How to prepare for a home loan rate hike

While the RBA has signalled that the next increase to the cash rate likely won’t occur until 2024, many analysts are betting the central bank will be forced to move sooner than anticipated.

Whether the RBA’s guidance can be taken at face value or not, it pays to be prepared. Below, we’ve compiled a few things mortgage holders can do to make sure their finances aren’t hit too hard when rates do eventually go up.

Switch to a fixed rate loan

One way to hedge against future rate increases is by switching to a fixed rate loan. This lets you lock your interest rate for a set period (usually one to five years), ensuring your repayments will stay the same even if your lender decides to hike their rates.

Just keep in mind that fixed rate loans don’t always offer the same features as variable ones, so you might lose access to your offset account or redraw facility.

And while many fixed rate loans let you make extra repayments, you might be limited in how much you’re allowed to contribute throughout the term. This can put you at a disadvantage if you receive a cash windfall and want to put it towards your loan.

Consider splitting your loan

If the idea of fixing all of your loan doesn’t appeal, there’s also the option to split it. This takes your home loan and divides it into two accounts, one with a fixed interest rate and the other with a variable one.

While the interest rate on the variable portion might change over time, either in response to moves by the RBA or out-of-cycle decisions by your lender, the fixed portion will stay the same for the duration of the term.

A split loan therefore acts as a partial safeguard against rising interest rates, while also preserving some of the flexibility and features that typically come with variable rate loans.

Set a budget

A sudden interest rate hike can deliver quite the shock, particularly if you’ve organised your monthly spending around your mortgage repayments. To make sure you can accommodate any changes, it could be a good idea to start tracking your expenses.

This can open your eyes to any unnecessary purchases you might be making and help you to rein them in. Thankfully, there’s no shortage of budgeting apps that can help, many which let you link your bank account and record your expenses automatically.

Make use of your offset account

It’s always a good idea to have an emergency savings fund, and by holding it in an offset account you can reduce the balance on which your lender charges interest.

The more money you have in your offset account, the better. For example, if you have $30,000 in an offset account and owe $250,000 on your mortgage, you would only be charged interest on $220,000

Find a cheaper deal

If you anticipate a rate hike, it might be worth sitting down with your lender to negotiate a cheaper deal. To give yourself the best possible chance, make sure to familiarise yourself with other rates on the market, along with the rates your lender offers to new customers.

If you don’t have any luck haggling, it might be time to think about refinancing. If you can knock even a few percentage points off your rate now, it could help cushion the blow if the interest rate environment changes in the years to come.

For a look at some of the offers currently on the market, reach out and let’s talk.

Source: Niko Iliakis

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