How to prepare for an interest rate rise: A comprehensive guide to mortgage refinancing
15 December 2022
Are you acutely aware of the upward interest rate spike in Australia and wondering what options you have when it comes to your mortgage? As the Reserve Bank of Australia has increased the official cash rate over the past year, the amount of home owners and investors looking to refinance their mortgage has also increased.
Whether you’re looking to buy your first home, make a significant investment, or refinancing your current mortgage, knowing where your repayments sit, and how you will be impacted by any further interest rates changes is essential to ensuring you can meet the changing repayments required.
Assess where you are currently sitting and how changes in the interest rate will impact your repayments.
It's important to understand how changes in the interest rate will impact your monthly repayments and the overall interest charged on the loan.
If you're currently on a variable interest rate, your repayments will likely increase if the Reserve Bank of Australia (RBA) lifts the official cash rate.
You can use an online loan repayment calculator to see how much extra you may need to pay each month, and over the life of the loan. Remember that a slight change in the interest rate can significantly impact your repayments.
The table below shows the estimated changes in monthly repayments and interest paid as the interest rate increases for different loan amounts, these figures are based on a 25 year loan term:
If you have a fixed-interest rate loan, your repayments will generally stay the same, even if the cash rate rises. Fixed-interest rates don’t last forever though, so consider what rate you will be able to manage well before the fixed-term finishes.
If you’re able to, consider fixing all or a portion of your loan. This will allow for planning, and will help you make an informed decision on whether now is the right time to buy or refinance, and whether you're getting a good deal.
Minimize other sources of debt. Interest rates can rise on other credit products, not just home loans. Pay off (if possible) or consolidate personal loans & credit cards into the home loan. You can also select a shorter timeframe so you're not stretching debts over a much longer term.
Remember, interest rates are likely to rise in the near future, so it's best to be prepared well in advance!
Prepare your budget considering any expected interest rate changes
If you're in the market for a new home, now is the time to start thinking about how a rate rise could impact your budget.
The good news is that most of the big banks (Commonwealth, Westpac, ANZ, and NAB) provide their own budgeting overviews. They will calculate and lump transactions together based on the category (e.g., mortgages, personal loans, credit cards) and indicate your monthly expenses based on what flows through your account. This can be a really helpful way to get an overall picture of your spending.
If you're comfortable using technology, there are also many great budgeting apps that can help you manage your money better. These apps tend to have more features than bank budgeting overviews, so they can be a great option if you want more control over your finances, they can also help you keep track of your spending regularly. A simpler option to an app though is something like the budgeting templates created in Excel.
Whatever route you decide to take, it's important to remember that having a buffer is always a good idea. Make additional repayments from the commencement of the loan to put you ahead of rates rise, and when it comes to loans, you may wish to consider those with offset or redraw features so that you have access to additional funds if needed.
Reassess your mortgage and whether refinancing is the right move for you
Now is also an excellent time to reassess your mortgage and whether refinancing is the right move for you. There are several benefits of refinancing; mortgage refinancing might be the right move for you, especially if you can take advantage of a cash-back offer from a new lender. Just be sure to factor in any exit or set-up fees, as these can eat into any potential savings.
If you're on a variable rate, now might be the time to switch to a fixed rate if possible, so you're not hit with any unexpected hikes.
But it's about more than just getting the lowest rate possible. You also need to look at the overall cost of the loan, which is where comparison rates come in. Comparison rates take into account all the upfront and recurring charges associated with a loan, giving you a pretty good indication of the 'true cost' of the loan.
For example, you may be offered a loan with an interest rate of 4.40% p.a. and a comparison rate of 4.50% p.a.
At first glance, it might look like the loan is cheaper because it has a lower interest rate. But when you look at the comparison rate, you'll see that there are actually fees and extra charges associated with that loan that add an additional 0.10% p.a., making it more expensive.
So when comparing loans, make sure you look at both the interest rate and the comparison rate to get an accurate idea of the overall cost of the loan.
Another option is to switch to a loan product with your current lender that has fewer features but is also more affordable. This can be a great way to reduce your monthly repayments without having to switch banks.
Whatever you decide, it's crucial to stay ahead of the curve and be prepared for when interest rates do eventually go up.
Speak to a Lending and Finance Adviser
One of the best things you can do to prepare for an interest rate rise is to speak to a lending and finance adviser. Why? Because they can find optimal solutions tailored to your personal circumstances without the sales pressure or expectations from meeting directly with lenders themselves.
Usually, the adviser is paid by the chosen lender, so you save time and money by working with them. And with so many loan options available, an adviser will help source the right loan options for you.
By understanding how interest rates work, assessing your current financial situation and taking action to improve your repayment ability, you can be confident in your circumstance and that you'll handle any rate rises that come your way.
If you would like to consider refinancing, or want to know more about working with a lending adviser, contact us today.