In light of interest rates continuing to rise, we chatted with licensed financial adviser and Money.com.au spokesperson Helen Baker to get her expert advice.
Helen shares her insights into the various options for dealing with rising interest rates:
1. Seek advice. Consider seeking guidance from a mortgage broker and financial adviser to establish a plan for your specific financial circumstances. The adviser can help you work out your loan servicing capabilities, advise how to best structure your mortgage, explain which loan options may help you, and even how to reduce expenses to increase your disposable income.
2. Weigh up the pros and cons of fixed vs variable rates. A few months ago, you could get fixed rates that were lower than variable rates. However, now, fixed rates are averaging 4-5-plus per cent (with shorter fixed terms offering rates at the lower end), while the average variable rate is 2.5 per cent and is likely to be 3 per cent by end of June. You will need to try to forecast where rates will go and work out whether it is best to pay more interest in a fixed- rather than a variable-rate loan. Will variable rates outpace fixed rates over the next three to five years? Keep in mind that when the fixed term ends you will go to a variable rate.
3. Have a loan-repayment strategy. A loan repayment strategy might include breaking up your borrowed amount into fixed and variable loans if you can make extra payments and reduce the variable loan faster. Are you confident your household income will remain stable, or will your circumstances change? You might decide to lengthen your loan term for a while to reduce your repayments, keeping in mind that the longer the term the more interest you will pay over the life of your loan. There are other components beyond interest rates that can make your money go further. Your strategy may require you to have a loan with an offset account or redraw facility, but know that the lowest-rate loans don’t often come with these options.
4. Have a debt-reduction strategy. Think about consolidating debts from high-interest credit lines – including credit cards – into the lowest interest credit line available: your home loan. This can be beneficial for those who have lower credit scores and allows time to build a better credit history. Consider creating a household budget that you can stick to, and if you have a high-spending habit consider freeing yourself from credit cards until you develop strong habits and can get on top of your spending.
5. Will you need LMI if you refinance? If you are a new homeowner looking to refinance, will it be worthwhile if the property value is declining? Will it be possible if your loan-servicing capabilities have weakened in the last few months? If the equity you hold in your property declines and you need to borrow 95 per cent of your property value when you refinance, you may need to pay lenders mortgage insurance.
6. Be aware of lender promotions. There are several lenders offering promotions such as lump-sum cash in the thousands to attract refinancers. Read the fine print to check whether these rewards are worth it against the interest rates, home loan options, upfront fees and set-up costs that they come with.
If you’re looking to get into the property market, or you would like to discuss the current market value of your property, please contact James Giltinan on 0417 250 691 or firstname.lastname@example.org – I’d love to chat.