Tips to Cope with Rising Mortgage Interest Rates

Borrowers with Home Loans Need to Prepare for Rising Rates

Oct 11, 2009 Pauline Mascarenhas

Australia has had its first official rate increase in 19 months and the view of many economists is for further increases in the not too distant future.

Borrowers in Australia have had a prolonged period of low home loan interest rates. In fact, according to The Reserve Bank of Australia, it has been a 49-year low.

With the recent 25 basis point increase in the official cash rate and the resultant increase in the mortgage rates by the banks, current indications are moving towards further interest rate rises. It is time for home owners to evaluate their debt position, and put strategies in place to help future mortgage repayments. Below are few tips to help with the process.

Compare Home Loan Products

There are many mortgage loan products in the market. Lenders structure products to suit various types of clients. Therefore, it is important to make sure that the current loan is the most suitable for the purpose and lifestyle of the borrower. For instance:

One loan product may come with a slightly higher interest rate, with an attached offset account which might suit borrowers with high cash flow income.
There are loan products with lower interest rates and very little or no fees but have no other features attached, with will suit borrowers who want a simple home loan.

With the many and varied products available it may be easier to consult a reputable mortgage broker to help with choosing the right home loan.

Paying a Lump Sum off the Mortgage

Any reduction in the capital will result in reducing the loan term and thereby reduce the overall interest payments. If the loan has a redraw facility and there are available funds in the loan account, consider depositing these funds into the loan and refinancing it to reflect the lower capital level.

Consider a Fixed Interest Rate

For mortgages on investment properties, a fixed interest rate may suit. Knowing what the payments are for a period of time will help with the budgeting and/or setting the rental for the property. However, making a decision to fixed rates needs careful analysis and seeking profession help will be valuable.

Reorganize the Payment Structure

If the borrowers are juggling multiple debt repayments, consolidating them into one repayment will reduce the monthly commitment. However, it should be remembered that this is not a debt reduction strategy but a coping mechanism. If able to, paying more than the minimum required will help towards debt reduction.

Extending the Term of the Loan

If the loan repayment is a problem, although not the ideal option, extending the term of the home loan will stretch the loan amount owed over a longer period of time, thereby reducing the amount of the regular payments. However, this strategy will increase the amount of interest paid over the term of the loan.

Whatever loan options are chosen, planning ahead to meet the increased loan repayments in the event of interest rate increases will help to manage debts better.

The copyright of the article Tips to Cope with Rising Mortgage Interest Rates in Mortgages/Loans is owned by Pauline Mascarenhas. Permission to republish Tips to Cope with Rising Mortgage Interest Rates in print or online must be granted by the author in writing.

Rising Interest Rates Require Coping Strategies