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How to get ready for a rate increase

Although it is impossible to completely estimate when interest rates will increase, there are indications that a rise could occur as soon as August 2022. Every homeowner, real estate investor, and first-time home buyer wants to know when official interest rates will increase and how to get ready for it.

Covid-19 and its effects on future interest rate increases

Nowadays, average mortgage sizes are far larger than they were five years ago, so the RBA won’t need to raise interest rates as quickly as in the past. The total magnitude of any future rate increases is therefore expected to be very small.

Many families have accumulated significant savings buffers during the COVID-19 pandemic, are paying off their mortgages faster than required by their lenders, and have accumulated significant sums in mortgage offset accounts.

When the cash rate increases, what happens to your mortgage?

  • Your interest rate and thus your monthly mortgage payments will rise if you have a variable rate home loan and your lender decides to raise rates in line with the cash rate.
  • Your interest rate won’t change if you currently have a fixed-rate mortgage during the agreed-upon fixed term period. However, once this fixed period expires, your home loan could return to the usual variable rate set by the lenders. Your mortgage payments could go up as well because this could be more than your existing fixed rate.

Advice: Your lender may not be required to raise your real repayments for some time after interest rates rise if you are already paying above-minimum payments.

Interest rates rising; owners of investment property

Interest rate increases may have a variety of effects on real estate investors. Higher interest rates, coupled with steadily rising home prices and stricter loan requirements, could provide investors an edge over first-time homebuyers, especially in regional locations. Higher mortgage interest rates will have an impact on cash flow for real estate owners, but rising rents and bigger reserves could soften the hit, according to experts.

Due to historically low mortgage rates and rising rents, the majority of current investors have adequate cash flow. When the time for the next rental review comes around, some investors might try to raise their rents. In contrast, property investors pay higher interest rates than owner-occupiers, so any increase in rates could be more painful for them.

People’s ability to borrow will be impacted since borrowing capacity may be a little bit lower and borrowing power is determined by the interest rate on top of a borrower’s buffer rate.

Advice on preventing an increase in interest rates:

1. Utilize an offset account to make additional repayments.

Making additional loan payments, if you’re only making the minimum required, can help you pay off your loan faster and pay out less interest overall. It may be worthwhile to use an offset account now to make additional payments against the principle of your loan if your lender permits them without imposing a fee.

An offset account is a transaction account that is connected to your mortgage. Contrary to additional repayments that reduce your principal, the money you put into your offset account helps to “offset” or lower the interest you pay. The additional benefit is that you may be able to access these funds if necessary, for example, to pay for home renovations.

2. Change the rate from variable to fixed

By switching to a fixed rate, you can fix your interest rate for a period of two to three years. If you have additional expenses to take care of, it gives you assurance about your repayments and peace of mind.

The disadvantage is that you are limited in how much you can pay in extra repayments, and the lender will charge you if you opt to refinance later on within the stipulated time frame.

Advice: To give yourself some flexibility and certainty, you might be better suited moving only a portion of your mortgage.

3. Opt for P&I instead of IO repayments

As interest only rates are frequently substantially higher than principal and interest repayments, if you own an investment property you may want to consider moving from interest only (IO) to principal and interest (P&I). Additionally, they frequently increase initially when a trek is imminent.

Using interest simply because you are unable to make P&I payments is not a wise long-term decision because you will wind up paying more for the loan overall.

4. Think about refinancing

It might be worthwhile to look into lower-rate lenders if your lender increases your interest rate past the point at which you can comfortably afford it and you’ve been making mortgage payments for a while with some equity built up.

In a period of rising interest rates, one way to give yourself a rate reduction is to refinance to a home loan with a lower interest rate. The typical owner-occupier variable interest rate in January, for instance, was 3.10 percent (paying principle and interest).

5. Live within your means

Spending more than you can afford is one of the biggest blunders people make when preparing for an increase in interest rates. You might temporarily skip or stop making mortgage payments as a result. High living costs may eventually make it more difficult for you to refinance your mortgage and receive a better rate.

6. Utilising your redraw facility frequently

It is advisable to withdraw additional repayments you have made to your offset than to continuously use your redraw facility. While an offset account normally allows free withdrawals, the fees associated with using your redraw facility might be fairly substantial.

7. Regularly review your loan.

Because they become complacent with their mortgage and fail to check their rate frequently, the majority of consumers are unprepared. In actuality, the lender won’t let you know when your rate has increased. Calling a mortgage broker to see if you qualify for a lower rate with another lender is the easiest action you can take.

Basic Advice Caution

The information on this page and on this website has only been created for general informational purposes; it does not constitute personalised counsel for any one individual. Any advice found on this page or on this website is general advice and does not take into consideration the specific needs, financial circumstances, or investment objectives of any one person.

Before making an investment choice based on this advice, you should think about whether it is appropriate for your unique investing goals, objectives, and financial situation, with or without the help of a securities adviser. Additionally, the examples given on this page and across this website are just meant to serve as examples.

Although every effort has been made to verify the accuracy of the information contained on this page and on this website, Chan & Naylor, its officers, representatives, employees, and agents disclaim all liability [except for any liability which by law cannot be excluded), for any error, inaccuracy in, or omission from the information contained in this website or any loss or damage suffered by any person directly or indirectly through relying on this information.

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