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Rising interest rates have homeowners around the country feeling decidedly jumpy.
The Reserve Bank of Australia’s significant hike of 50 basis points in June 2022 took the cash rate to 0.85% and was the first back-to-back increase in 12 years.
It followed a 25 basis points rise in May, lifting rates out of the basement where they have sat at a breathtakingly low 0.1%.
The June increase will cost homeowners with a $500,000 mortgage around an extra $130 a month or $1600 per annum.
So what does the future hold for borrowers, with further jumps on the cards against the backdrop of high inflation?
If you seek advice and plan ahead, there are ways to soften the blow and even delay the impact of increasing interest rates.
And just like shopping around for the best deal on the latest 65-inch TV, you’d be crazy not to!
Firstly, take a deep breath, don’t panic and look at this with some perspective.
Home loan rates have been very low for more than a decade, giving many people the opportunity to buy into the market and own their own patch.
It’s not that long ago that interest rates were around double what they are now with a spike of 9.6% in September 2008.
That was in the middle of the Global Financial Crisis.
Skip back a couple more decades and your parents might remember paying 17% in 1989.
On the flip side, most mortgages are much higher now than they were then, even when taking into account interest payments as a proportion of household income.
So what can you do to minimise the pain?
The numbers game
By making fortnightly payments instead of monthly, you’ll get that loan down much more quickly.
That’s because there are 26 fortnightly payments in a year. You’ll effectively be squeezing an extra month’s worth of repayments into every year without even realising it.
With an $800,000 loan over 30 years at an interest rate of 5%, you’ll save around $210,000 in interest payments and own your house five years sooner!
An offset account
This really is the golden ticket.
If you plough every dollar you earn into an account that offsets your loan, you can shed years off of your loan.
That’s because if the home loan interest rate is 5%, you are effectively earning that on your money, instead of say the 1% being offered in a savings account.
And unlike bank interest, it is tax free!
Make extra repayments
Pour extra money into your mortgage whenever possible.
A surprise tax refund or a nice end of year work bonus will really cut into the mortgage if you can take it straight off your principal.
Interest payments are a necessity but if you can reduce your principal, you are well on the way to owning your home in record time.
Renegotiate and shop around
Stay vigilant and ensure you have got the best deal possible.
Work with an experienced mortgage broker who can advise you on the best way forward, which could include going to market to find the best deal across Australia’s many lenders, or even negotiating with your current lender for a better deal.
Do your homework and know what one-off, ongoing and exit fees are applicable, both with your old loan and your potential new one.
Variable or fixed?
The reality is, if you don’t have a fixed rate by now, you have missed the boat.
While fixed rates offer a level of certainty and security, the time to secure one is not when rates are already rising.
You’ll usually pay well over 100 basis points above the variable rate. They often come with hefty exit fees and don’t allow extra repayments.
Get advice today
It is more important than ever to get professional advice before making financial moves.
Calder Wealth Management are financial experts who can help you make the best financial decisions for your long term interests.
And to get the right finance strategy and deal, working with an experienced mortgage broker is essential. Talk to our team at Calder Finance Broking about your property goals.
Contact us today to discuss all of your financial needs and concerns.
Written by Hayley Walsh from Calder Finance Broking, for more information please visit the Calder Finance website. Please note that Calder Finance Broking Pty Ltd is a Corporate Credit Representative of BLSSA Pty Ltd ABN 69 117 651 760 ACL 391237.