Amid the biggest global pandemic in a century, house prices in Australia have risen by an average of 22.4% (the highest increase in 32 years). Coupled with inflationary hikes dominating the finance headlines and speculation about even more looming interest rate rises, it pays to be rate-rise ready.
How does this affect domestic borrowers? As an example, a 1% increase to the cash rate which, if subsequently passed on to borrowers, would take the average variable-rate owner-occupier mortgage in Australia to almost 4%. This adds about $270 per month to an average $500,000 loan.
But what if you're OK for now and concerned about the future?
Here are some ideas to help you manage your debt.
1. Be Aware That Repayments Can Rise & Fall
Ask yourself how any rate rises would affect your money goals, such as renovations and holidays, as well as other lifestyle choices. Online calculators can help you crunch the numbers.
2. Make Fortnightly Repayments Instead Of Monthly
According to financial advisors, simply making repayments every two weeks instead of once a month can save you significant money. It's all down to a timing trick. There are only 12 months in the year, but 26 fortnights.
So, you'll end up making an extra two repayments for the year without even realising it. Let's crunch the numbers.
If you have an $800,000 loan for 30 years at an interest rate of 5 per cent, over the life of the loan you could possibly save more than $210,000 in interest. Resulting in you potentially paying off your loan more than five years earlier.
3. Ensure That Your Home Loan Is Competitive
Make sure you're on the best deal with the lowest rate. The current rates on the market vary widely.
If your home loan isn't charging a competitive rate, not only are you wasting money but you'll also be left even more out of pocket if rates climb higher. It's worthwhile shopping around.
Despite some fixed rates already increasing, many banks are reducing their variable rates.
4. Scale Back Other Debt
Debt is not always a negative. But if interest rates head north, be mindful that you could be paying more on personal loans and credit cards. If you have an outstanding credit card balance, try chipping away at the debt today. Switching to a low-rate card with no annual fee can make this easier.
5. Ramp Up Extra Repayments Now
The best defence against higher rates is having a smaller loan balance. Making extra repayments or paying a lump sum now, helps to pay off the loan sooner and minimise the impact of possible future rate rises. Loans with offset or redraw facilities also provide you with the peace of mind to access that extra money if you need it.
Another example of this strategy is; if you manage to get a better deal on your interest rate, keep paying the higher amount. Or, if you get a tax return or unexpected bonus, decide to put part or all of it into your mortgage.
6. Pay Principal & Interest
Try and make sure you're making principal and interest repayments.
If you only pay off the interest, your actual loan remains the same. It is also generally a lower interest rate than interest-only loans, so it can be a win-win.
Finally, if you're already feeling financially stressed, it might be worth contacting your lender's financial hardship team. You could also ring the National Debt Helpline on 1800 007 007 to get free, independent help with managing your debt.
Disclaimer: This article provides general information only. For advice specific to your unique financial circumstances, please consult a professional.