Preparing your home loan for a rate hike
As the Reserve Bank continues their ‘wait and see’ policy with the cash rate, the same approach shouldn’t be used for your home loan. For the 15th consecutive month the RBA has kept the cash rate at its historical low of 2.50%, leaving financial economists divided on when the next cash rate rise will be.
In Australia’s largest Reserve Bank survey by finder.com.au, the average prediction for a cash rate increase from all 28 experts was June 2015. So, with an impending rate hike, how can homeowners prepare their mortgage?
Michelle Hutchison, Money Expert from finder.com.au, said there are little things homeowners can do now in order to get ahead.
“Spring is settling in, and with it a new mortgage season. Preparing for a rate rise now could save you money when it happens, so now is the time to take advantage of the current market and start preparing your finances to lessen the impact of looming rate rises.
“For instance, a home loan with an interest rate of 5.33 percent for a 30-year loan term of $300,000 has a monthly repayment of $1,671. If it the interest rate increases by 0.25 percentage points, it will add an extra $47 to your monthly repayments, which equates to almost $17,000 over the course of the 30-year loan.
“Make sure you research the features of your home loan to see where you can save money. Even putting away an extra $50 each month can make a big difference to your savings.”
finder.com.au tips on preparing for a rate rise:
Make extra repayments
If your loan allows you to make additional repayments without penalty, then you should budget your finances and look into making them. When the cash rate does rise you’ll be glad that you’ve paid down more of your principal, and you won’t feel the pinch as much as you would have.
Things to watch out for: If you’re in a fixed rate period and are able to make additional repayments, make sure there isn’t a fee for doing so, and check if you have a limit as to how many additional payments you can make.
Offset your principal
An offset account is another way to reduce the impact of a rate hike. This account is linked to your home loan and works just like any other transaction account where you can make regular deposits and withdrawals, but the balance works to actively offset your principal loan amount. For a 100 percent offset account, if you have $500,000 left to pay on your loan but you have $150,000 in an offset account, you’ll only pay interest on $350,000.
Things to watch out for: Check to see if your loan allows for a 100 percent offset account or if you only have a partial offset account. Also keep an eye on fees – some offset accounts charge fees on standard transactions, so make sure you know how much you’ll be paying.
Consider fixing your rate
If you’re looking for a way to take advantage of low rates or deals, now could be the time to fix your rate. A fixed rate can help you take advantage of the current low rate and lock it in for an extended period of time, also setting your repayments. Fixed rates are usually available for periods of between one and five years, although some lenders may offer longer terms.
Things to watch out for: When taking on a new loan you’ll need to consider refinancing fees like setup costs for your new loan. Also, fixed rate loans generally come with more restrictions than their variable rate counterparts. For instance, you might not have access to offset accounts or you may have restrictions on additional repayments. Weigh up the benefits of fixing against the costs before you take on the loan.
The cash rate has been stagnant for months, but your mortgage has still been moving. Make sure it doesn’t get left behind by using what’s at your disposal, and consider the options available to you.