Plan your rate rise buffer
AUSTRALIANS insure their homes, cars and even their pets, just in case something goes awry, so it makes sense to also be prepared for when interest rates inevitably rise from their current record lows.
John Tindall, a Choice Home Loans mortgage broker in Wattle Grove, Sydney, says many people have only experienced declining rates in the past 20 years, so few are prepared for the "extra bite out of their surplus income" when rates head north and repayments rise.
"A half a per cent increase on a $600,000 loan will add $2100 a year to repayments. That could be a family holiday lost," he says.
Budgeting
Tindall explains how homeowners can plan a rate rise buffer.
"There are a number of ways to insulate your family budget against a rate rise," he says.
"Putting spare cash into an offset account is a very good option, since it reduces your payable interest and gives you a ‘slush fund’ should you need to make additional payments."
"Fixing the interest rate when you think the time is right is another good option, because it gives you certainty over the term of the fixed period. It’s a trade-off between certainty and flexibility," Tindall says.
Pros and cons of fixing your mortgage rate
"Generally speaking, the longer you want to fix, the higher the interest rate could be too," he adds. Tindall says speaking with a banker or broker to understand the options is important.
"A third option is to make additional repayments, reducing the loan size and again paying less interest."
Tindall says most lenders already assess applicants on their ability to pay between 7-7.5per cent interest rates.
"The logic is that if you can repay a loan at 7per cent plus when rates are at around 4per cent, then you should be able to adjust without too much stress," he says.
"Some people, however, spend all their surplus income on lifestyle and should a bite happen, their lifestyle spending may have to be tightened.
"We provide our clients with a budgeting spreadsheet, so they can adjust to their mortgage in the early days and again should circumstances change," Tindall says.
- realestate.com.au