Navigating Interest Rate Rises

When the Reserve Bank of Australia [RBA] raises rates, banks and other lenders follow suit and raise home loan interest rates. If you are on a variable rate and pay only the minimum installment, your mortgage repayments will go up when interest rates rise.

The RBA has increased interest rates by 0.25% yet again. This follows two increases in August and November 2007 and three increases in 2006. As a result,
standard variable home loan rates are now approaching 9%.

Variable or fixed rate?

When interest rate rises go up, it might already be too late to beat the rate rise by switching to a fixed rate as banks often increase their fixed rates when they're expecting a rate rise.

However if you need to budget and really can't afford much higher rates, a fixed rate give you security.

But fixed rate mortgages often restrict the repayments you can make and penalise extra repayments, so if you can afford to pay more than the minimum, a better option may be a split loan.

Splitting your loan between fixed and variable rates can offer an element of security while still giving you flexibility. Alternatively, some lenders now allow you to make extra repayments to a fixed loan, up to limit of say $10,000 per year, without having to pay a break fee.

Make extra repayments if you can

Increasing how much you pay, particularly in the early years, can have massive long-term benefits saving you thousands of dollars in interest.

Example: Georgina has a $400,000 variable loan with an interest rate of 8.5%. The loan has 25 years to run at her present repayment rate [the minimum fortnightly repayment]. Adding $100 per fortnight to the repayment would cut 4.5 years and over $119,000 in interest from Georgina's loan.

Easy ways to make extra repayments

Pay fortnightly - By paying half the monthly amount every two weeks you make the equivalent of an extra months repayment each year.

Features to consider

It's important not to judge a home loan solely on the interest rate and up-front fees. Be aware of other fees including ongoing monthly fees', exit fees, and deferred establishment fees' which are often charged if you wish to leave a variable loan in the first five years. Check out the costs and benefits of extra features, such as an offset account, which may save you money, or a redraw account, which allows you to withdraw some repayments you've made [fees and conditions apply!].

Other loan features to pay attention to include lenders waiving fees and charges for other accounts held with them, such as monthly transaction account keeping fees.

Make sure extra repayments are not penalised. Some loans, such as fixed loans, may limit the amount by which you can reduce your loan.

For more information about how interest rates will affect your situation or help in determining whether fixed or variable is the best option for you, contact us on 07 5477 5300.