Analysts are forecasting interest rates to rise by at least 1% by the end of the year. Here are 10 things you can do now to keep ahead of the inevitable rate rise:
1. Fix now
Fixed rate has a number of advantages for property owners. These include an interest saving if rates increase during the fixed term of the loan and the knowledge that your monthly repayments will remain the same.
With this certainty, it’s easier to budget for the medium to long term. If you fix your loan at the bottom of the market, you can reap the benefit of a secure and low rate when the rest of the market bears the risks of higher interest rates. On the other hand if interest rates fall, you are stuck with the higher fixed rate.
At the moment, fixed rate loans are around 0.5% higher than their standard variable rate counterparts, but think very carefully and crunch the numbers before locking in your rates.
2. Shop around and make sure your bank knows it
One of the most powerful tools you can have in the search for the best home loan is information. Make sure you have rung half a dozen lenders before you start talking to your bank about getting a new loan or refinancing your existing loan. Make sure you know what rates and features are offered by each of them on comparable products. Be ready to tell the bank what you are looking for and don’t be afraid to…
Remember that competition among lenders remain fierce despite what they tell you. They are all dead keen to get your business. Try twisting their arm a little bit. Asking your lender for half a percent off their rate might not work, but see whether they will give you a break on establishment costs or ongoing fee.
4. Get a cheap loan pay at an expensive rate
If rates are on the rise, why not get in ahead of them. Get a variable loan with the lowest rate you can find (or better still a fixed loan that allow you to make extra repayments), and make your repayments as if rates are what they were a couple of years ago. If you have a loan at 6% and you are paying it of at 8%, you won’t even notice when rates go up. And you’ll be paying off your loan quicker and saving yourself a packet.
5. Watch for then signs that rates are on the rise and move fast
Read the financial pages of the newspaper. Keep an eye on the TV news. What are the experts saying? If the economy is starting to move then interest rates might be on the way up. Find out when the Reserve Bank meets. If rates are going to move, move with them. Subscribe to the weekly mortgage and property news update from Your Mortgage magazine www.yourmortgage.com.au. Use the information contained in these pages to your financial advantage.
6. Use your equity
If you have already paid off some of your home, you are said to have equity. Equity is the difference between the value of the property and the amount you owe the bank. If you are careful, you can use this equity to your advantage and help to minimise the effect an interest rate rise might have on you. Many lenders will allow you to borrow using your equity as collateral. Using an equity loan to improve your property could be a good way to make sure that your home increases in value faster than interest rates rise.
7. Switch to a lender with a lower rate
It may sound like a simple statement but switching out of your current loan and taking a loan at a lower rate can help to protect you against the rigours of an interest rate rise. If you have a loan that is tricked up with all the features, or even a standard variable loan you might find that you could get a no frills rate that is as much as a percentage point cheaper than your loan.
8. Know what your loan costs are
Principal and interest repayments are not the only thing about your loan that is going to cost you money. It is vitally important to know what you’re going to be up for in other fees and charges, both at the beginning of your loan and over the period of your loan. Keep an eye on fees such as valuation, establishment and legal fees which you will cop at the front of your loan. In many cases these are unavoidable. In some cases, the upfront fees will reduce the rate you pay offer the term of the loan, so it is difficult to tell whether you will be better or worse off paying higher upfront fees. The way around this is to look for the comparison rate. The comparison rate (which is published in the tables at the back of this magazine) takes into account the initial and rollover interest rates as well as the upfront and ongoing fees. It gives you the best indicator of the real cost of the loan.
It also pays to look at the costs you might incur during the course of your loan. Fees to look out for include exit fees and mortgage discharge fees (which are not necessarily the same thing), ongoing fees which can be as much as $10 a month and portability fees - which you might incur if you move house and want to take you loan with you.
9. Find a lender or a broker that pays you money
Mortgage House, Peach Home Loans, Refund Home Loans and Mates Rates are just a few who are offering cash backs to their borrowers. Make sure that you check the fine prints to make sure there’s no string attached and that the rebates are not factored into your mortgage rate.
10. Don’t be fooled by the bells and whistles
As with all things, with a home loan each extra feature will cost you money. Sit down before you take out a loan and work out the features that are really going to make a difference to you. Do you need a redraw facility? Is loan portability likely to be a necessity? If you don’t need it, find a loan without it. It should be cheaper.