Managing Rising Mortgage Interest Rates

How to Cope With Increasing Home Loan Interest Costs

Oct 12, 2009

Choosing a fixed rate loan, saving for a bigger deposit, making more repayments, using an offset account and borrowing from a non-bank lender can reduce mortgage rates.

Following the increase in the official cash rate by the Australian Reserve Bank in early October 2009, the big bank lenders have increased their variable home loan rates by 0.25%. And as Australia’s economy recovers further, there are signs that mortgage interest rates will increase a few more times in the next 12 months, much to the dismay of home buyers.

Are there ways for managing rising mortgage rates? There certainly are but these methods generally require discipline. Here are some tips on how to reduce and cope with increasing home loan interest costs.

Choose a Fixed Rate Home Loan

Variable home loan rates fluctuate. But when interest rates seem to be going up and like to keep rising, it may be a good idea to choose a fixed rate. By fixing a home loan rate, the home buyer knows exactly how much he needs to pay every month for the fixed rate duration even if interest rate continues to rise during that time. However, if interest rates drop, he’ll be stuck with the same repayment. Another downside is that most fixed rate home loans don’t allow extra repayments, another strategy to cut down mortgage interest rates.

An alternative is to split the home loan into a variable loan and a fixed rate loan. The fixed part gives borrowers certainty and security while the variable part allows them the flexibility to make extra repayments.

Save for a Bigger Home Deposit

Saving for a home deposit should always be a priority for new home buyers. Save for a bigger deposit if possible. The logic is simple, the bigger the deposit, the less needs to be borrowed and less interest paid back in the long run. Also, those who manage to put in more than 20% of the property price will not have to pay mortgage insurance, which can cost thousands of dollars. So use whatever money-saving strategies available to raise a much bigger house deposit to manage mortgage interest rates.

Make More Home Loan Repayments

A very effective way to cope with increasing home loan interest costs is to make more repayments – pay fortnightly rather than monthly. There are 12 months but 26 fortnights in a year. By splitting the monthly repayment into two installments, a borrower will be paying 13 monthly installments yearly. Over the course of 20 to 30 years, this will save thousands of dollars in interest costs.

Another way is to pay more additional monthly repayments than are required. Add in another $100 each month if possible or when there is extra cash. If this approach is used regularly, the loan term can be reduced too.

However, borrowers with fixed rate home loans may not be able to use this method to cope with increasing mortgage interest rates as there are restrictions and penalties regarding extra loan repayments.

Use a Mortgage Offset Account

To save interest on a home loan, a borrower can also use a mortgage offset account, an account in which savings or salaries are linked to the mortgage. With money sitting in that account, the interest earned by the savings will reduce the interest charged on the mortgage.

Borrow From a Non-Bank Lender

In Australia, the mortgage market is still dominated by the big four banks – ANZ, Commonwealth, NAB and Westpac. They are popular choices because of their integrated banking packages that offer more convenience to home loan borrowers. However, their interest rates are higher too.

So why not consider borrowing from a non-bank mortgage lender such as a credit union or building society instead? Credit unions offer lower interest rates and often don’t charge ongoing fees. Some even have integrated banking facilities like those offered by big banks. Building societies, the original home loan lenders, still provide some of the best bargains in mortgage lending.

Rising mortgage interest rates are inevitable as Australia’s economy recovers. To cope with increasing home loan interest costs, home buyers can choose fixed rate home loans and save for a bigger home deposit. If possible, make extra home loan repayments and use a mortgage offset account. Borrowing from non-bank lenders like credit unions and building societies may cut down mortgage interest rates as well.

Thomson, Jimmy. The Ultimate Guide to Buying & Renting Houses & Apartments. New South Wales: Fairfax Books, 2008.

The copyright of the article Managing Rising Mortgage Interest Rates in Home Mortgages is owned by Wei Yin Wong. Permission to republish Managing Rising Mortgage Interest Rates in print or online must be granted by the author in writing.