How To Prepare For An Interest Rate Rise

If you’ve recently taken out a home loan, it can be especially challenging to manage when interest rates suddenly rise. We understand that navigating the current financial climate is difficult, and we are here to help make it easier.

With our advice and guidance, you will surely be able to get back on track and regain control of your finances. Continue reading to find out how to prepare for an interest rate rise and minimise potential financial hardship.

1. Speak To A Mortgage Broker

If you are running your finances to the wire just to keep up with mortgage repayments, it may be that you need a home loan health check from a mortgage broker.

They can:

• Assess your situation in full: By running through simple calculations about where you will stand if interest rates rise, they can help you find a solution that will put you in a better financial position.
• Help you refinance: One option may be to refinance your home loan and switch to a lender that will offer you a sharper interest rate.
• Negotiate with the banks on your behalf: Mortgage brokers have strong relationships with major banks and lenders so that they can access heavily discounted rates.

Give us a call on 1300 889 743 or fill in our free assessment form, and one of our mortgage brokers will help you plan to prepare for an interest rate rise.

2. Find Out If You’re Eligible To Refinance

You should consider refinancing if:

• You owe less than 80% of the property value on your mortgage.
• You are on a variable rate: You should consider refinancing every 6-12 months but just keep in mind that you’ll add an enquiry to your credit file every time you refinance.
• You are no longer on a fixed rate term: Despite the break costs and early exit fees, it sometimes makes sense financially to refinance within the fixed period, especially if you recoup these costs within two years of refinancing.

Try our refinance calculator to work out how much you’ll save by refinancing.

In this way, you can determine whether this is the best option for you to prepare for an interest rate rise.

3. Switch From A Variable To A Fixed Rate

The idea of switching to a fixed rate is to lock in the good times for anywhere between 2-3 years.

It gives you certainty over your repayments and peace of mind.

The drawback is that it limits your ability to make extra repayments, and the lender will charge you if you decide later to refinance within the fixed period.

You should speak to a mortgage broker and discuss your long-term plans.

For example, you may be better off switching just a portion of your home loan so you have some flexibility and certainty.

4. Make Extra Repayments With An Offset Account

If you’re currently making minimum loan repayments, making extra repayments can help you minimise your loan and reduce the overall interest payable on your home loan.

Golden tip: Making extra repayments with an offset account gives you the best of both wolds.

A Savings Buffer That Offsets Your Interest

If you make extra repayments to your offset facility, you can ‘offset’ the interest on your home loan.

For example, if you have a mortgage balance of $600,000 and $15,000 in your offset account, you will only pay interest on $585,000.

So how much are you saving?

Well, if you were paying 4.50% annually, you would save $40,856 over the life of the loan and shave one year and one month off your home loan.

Try the offset facility calculator for yourself to discover how much you could save.

If you haven’t done so, a good strategy is to link your salary payments directly to your offset account.

This way, your home loan repayments will be withdrawn automatically, and everything left over will offset your interest.

It’s a clever way to give yourself a savings buffer to soften the blow of higher mortgage repayments.

Access The Funds When You Need Them

Unlike a redraw facility, withdrawing from your offset account is free, other than your annual home loan package fee.

The other drawback on redraw is that this feature is sometimes not available on fixed-rate loans.

An offset account works much like your everyday transaction account, unlike a redraw facility requiring you to transfer funds to your transaction account online or on your bank app.

Unsure what solution is right for you?

Call us on 1300 889 743 or complete our online enquiry form and we can discuss your home loan options and help you better manage your mortgage repayments.

5. Calculate How A Rate Increase Could Affect Your Home Loan

The monthly repayments before and after the most recent increase in the cash rate are compared in the chart. (The loan repayment figures are from our repayment calculator based on the lowest variable rate we have on offer for a 30-year term as of 1 November 2022.)

You can use our home loan repayment calculator to crunch the numbers based on your loan amount and interest rate. You’ll better understand how different rate increases can affect your repayments and whether you need to adjust the family budget.

6. Make A 3-6 Month Plan

Apart from focusing on your mortgage; there are other actions you can take to put yourself in a better financial situation.

In this way, you can better survive an interest rate rise.

Set A Budget

If you can’t come up with the funds to make extra repayments, start budgeting.

It is a great way to work out where your income is being spent.

Cut Unnecessary Spending

It is always a good idea to track your income and expenses to get an idea of what you can do to save money.

You should also assess your monthly, quarterly and yearly expenses, such as electricity and water bills, council rates, mobile phone bills, car insurance, car registration, and other irregular expenses that may not be covered in your week-to-week budget plan.

Many good mobile phone apps can help you track income and expenses.

Choose P&I Over IO Repayments

If you have an investment property, you might want to switch from interest only (IO) to principle and interest (P&I) because IO rates tend to be much higher than P&I rates.

They also tend to be the first rates to rise when a hike is around the corner.
Golden tip:Switching to interest-only because you can’t afford P&I repayments is not a good long-term strategy because you end up paying more over the life of the loan.

Clear Your Debts

Clear up any credit-card debts and pay down personal loans, including car loans.

Pay down any debts using funds you might have in a low-interest savings account.

7. Avoid These Common Mistakes During A Rate Rise

Living Beyond Your Means

One of the most common mistakes that people make when it comes to preparing for an interest rate rise is that they spend more than they can afford.

In the short-term, this could see you miss or default on your mortgage repayments.

Over the long-term, high living expenses can affect your chances at refinancing your home loan to get a sharper rate.

Accessing Your Redraw Facility On A Regular Basis

Withdrawing extra repayments you have made to youroffset facility is a better strategy than constantly withdrawing from your redraw facility.

The fees can be quite high each time you withdraw using your redraw facility, whereas an offset account typically has free withdrawal.

Setting And Forgetting Your Home Loan

Most people are unprepared because they simply get apathetic about their mortgage and forget to check their rate regularly.

The lender will not notify you when your rate has risen.

The simplest step is to call a mortgage broker to find out if you’re eligible for a cheaper rate with another lender.

The best mortgage brokers are there with you even after settling your home loan.

Are You Ready For An Interest Rate Rise?

Call on 1300 889 743 or fill in our free assessment form and let one of our expert mortgage brokers assess your situation in full.

We can guide you through the right steps to prepare you for rising interest rates, whether it is through refinancing or simply managing your home loan more effectively.