Dealing With Interest Rate Rises
Below is a MRR and PLR article in category Finance -> subcategory Wealth Building.
Navigating Interest Rate Increases
With interest rates climbing by 0.25% and potential further hikes on the horizon, it’s crucial to be prepared. The Reserve Bank of Australia (RBA) recently released a Statement on Monetary Policy indicating a "strong tightening bias." They expect inflation to hover around 3% by the end of 2007 and continue into mid-2008, suggesting possible further rate increases.
Managing Mortgage Repayments
Rising interest rates can make managing mortgage repayments challenging, especially when incomes don’t increase proportionately. Here are some strategies to help manage this situation:
Negotiate a Better Rate
The advertised variable rate is often just a starting point. When I was exploring loans for an investment property, major banks like Commonwealth Bank, Westpac, and National Australia Bank initially offered their standard rates. But, once I indicated I was considering multiple lenders, they began offering discounts, ranging from 0.5% to 0.7%.
Remember, if you don’t ask, you won’t receive. Review your current rate and any discounts. If you're dissatisfied, make an appointment with your bank manager to explore options.
Consider Fixed Interest Rates
Discuss fixed interest rate options with your bank manager. Generally, a fixed rate is lower than the standard variable rate and can decrease monthly repayments, depending on the term.
Keep in mind, fixed-rate loans are less flexible and often lack redraw or offset facilities. However, locking in a rate for 3-5 years might save you a substantial amount if rates continue to rise. Be aware of break fees if you refinance before the term ends.
Many lenders offer the option to split your loan between fixed and variable rates. For example, if you have a $400,000 loan, you could fix $200,000 and keep $200,000 variable. This strategy hedges against rate increases while allowing you to benefit if rates drop.
Explore Refinancing
The lending market is highly competitive. If your bank isn’t offering satisfactory terms, consider shopping around. Smaller or lesser-known institutions often provide competitive rates and lower fees to attract new customers.
For instance, I bank with a Credit Union that offers competitive rates without set-up or transaction fees, and their personal service surpasses what I experienced with larger banks.
Major banks, including Commonwealth Bank, Westpac, and National Australia Bank, have dedicated loan consultants who can visit your home to discuss various options.
You’re in control, so do your homework. Understand the products and discounts available, and ask questions until you’re confident in your decision. It’s a significant financial commitment, and it’s essential to avoid terms and conditions you might later regret.
Considerations Before Refinancing
1. Be aware of potential break fees with your existing mortgage.
2. Ensure refinancing results in a better deal; independently verify the figures rather than relying solely on the lender’s word.
3. Understand the impact of your loan term. Refinancing over a longer term might reduce monthly repayments, but it could also increase the total interest paid.
4. The process can be lengthy and require substantial paperwork.
Conclusion
With or without rate rises, reviewing your mortgage regularly to secure the best deal is beneficial. Don’t hesitate to ask for your share of potential savings, as banks and lenders profit significantly from these arrangements.
Best of luck!
Cheers,
Rhys Campbell
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