How to Manage Your Mortgage When Interest Rates Rise

A rise in the cash rate means home loan interest rate rises too. Here are seven proactive strategies to help you stay ahead of the interest rate curve.

This month the Reserve Bank of Australia (RBA) increased the official cash rate after holding it steady for 13 months. The official cash rate is a figure set by the RBA that represents the interest that lending institutions must pay on the money they borrow from other banks. And now that cash rate is 0.35%, up 25 basis points from the record low of 0.10%.

The announcement has understandably created a bit of agitation among homeowners. As a homeowner you likely understand that when the cash rate rises, your home loan interest rate rises as well. But you may not be as sure about what it really means for your home loan repayments or what you can do to manage the rate rises.

Interest Rate Rises and Your Home Loan

How will interest rate rises affect you? Contrary to popular opinion, the RBA cash rate has no direct impact on home loan interest rates. This is because lending institutions are not obliged to follow or pass on the RBA’s decisions. However in practice they generally do, and the RBA cash rate undoubtedly informs decisions lending institutions make when setting their own interest rates.

So, inevitably, a rise in the cash rate means that home loan interest rates will also increase, as lending institutions seek to absorb or pass on the cost of the rise.

But there are different proactive strategies that you can implement, so you can stay ahead of the interest rate curve meet your loan obligations with ease.

How to Manage Your Mortgage When Interest Rates Rise

Strategy 1: Build in a Buffer

Whenever you are getting a new home loan – whether for a new purchase, or refinancing – you should always build in a buffer on your borrowing capacity. At Stapleton Finance, our borrowing capacity assessment process allows for an additional 3% interest rate fluctuation. This means that any interest rate rises that impact your home loan repayments, should remain comfortably affordable.

Strategy 2: Aim for a 13-month year

By making a simple math adjustment you can get substantially ahead of your loan payments. Rather than paying your home loan once a month, pay it every week. You’ll need to divide your monthly payment by four and then pay this amount each week of the year (all 52 weeks). The end result is that you will end up making 13 monthly repayments in a 12-month period and can potentially pay off your home loan three-and-a-half years early.

For example, if your monthly home loan repayment is $2500, the repayment becomes $625 per week ($2500 / 4), that is, if you make:

• 12 monthly repayments of $2500, you will pay $30,000 off your home loan in a year.
• 52 weekly repayments of $625, you will pay $32,500 off your home loan in a year.

Strategy 3: Use a 100% offset account

Your home loan is probably the biggest financial commitment you will make. Setting up an offset account and using it wisely can reduce the amount of your home loan and help you to pay it off sooner.

To use an offset account wisely make sure to:

• Direct your pay into your offset account.
• Use your credit card for daily expenses.
• Fully clear your credit card payment monthly from funds in your offset account.

Interest is calculated daily on an offset account, so even as your balance goes up and down with your daily transactions, you will stay ahead and lower your total home loan interest.

Strategy 4: Maximise any additional income

If you have a variable rate home loan, there is no limit on making additional repayments. Commit to allocating at least 50% of any net pay rise or bonus you receive at work into your variable rate home loan. This will allow you to reduce both the term and the amount of your loan without seeing any significant impact on your day-to-day lifestyle.

Strategy 5: Channel your rent experience

If you’re a new homeowner, there is a strong chance that your current home loan repayments are less than your previous rent commitment.

If you increase your home loan repayments to match your previous rent amount and pay that difference directly to a variable rate home loan or linked to a 100% offset account, you will reduce the amount owed on your home loan and pay it off more quickly. And since you’re already comfortable paying that amount, you won’t feel the pinch.

Strategy 6: Make your low-rate fixed rate home loan work for you

If you are on a low-rate fixed rate home loan (perhaps with one to two years remaining), increase your repayment to the market interest rates (if possible by 1.5%) and place additional repayments directly into a linked 100% offset account. This has two direct benefits:

1. You become accustomed to making a higher home loan repayment.
2. You get ahead of the interest rate curve because you are building a financial buffer into your 100% offset account.

Strategy 7: Annual increases

If you can, set yourself the annual challenge of increasing your mortgage repayments by 2.5%.

For example, if your weekly loan repayment is $625, an additional 2.5% is $16 (so your weekly loan repayment for that year becomes $641). But in that 12-month period, the additional $16 weekly adds up to an extra $832 paid off your home loan, a great result. The practical effect of this is that you should stay ahead of future interest rate rises and pay off your home loan more quickly.

Talk to An Expert

Of course, there are always other options (such as refinancing with a new lender) which can save you money over the life of your loan, or find some additional. Speak with our expert finance broker team to find out what your options are. We’re here to support you through any interest rate rises, and ensure that you continue to be happy with your loan.

Get in touch to talk through the RBA official cash rate increase and what it can mean for interest rate rises and your particular situation.

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