Australia money

6 best ways to manage rising interest rates

In an economy where home loan interest rates are as unpredictable as flipping a coin, what can you do?

Perhaps it's time to assess your type of loan and consider something else.

Westpac recently increased their rates 20 points in November 2015. Those in variable rate mortgages will have to meet the higher per cent of interest.

However, an October 2015 article in the Sydney Morning Herald explains that the rise may not be so bad. It states that only 35 per cent of Australians have a mortgage and the majority didn't pay less when the rates were low, so are unlikely to be paying extra with the new increased rates. Calculations showed that the average amount of extra repayments added to less than $10 a week.

Not everyone is as flexible as the rise and fall of interest rates. Should you be worried about what to do when rates increase?

There are options you can consider in order to combat these changes that'll hopefully work out better for you in the long run. Here are a few of them, as well as the possible benefits and repercussions that each option can bring.

1.  Take a look at your long-term goals

You may be able to change your type of loan, but it shouldn't be a quick decision.

Consider factors that will affect your finances in the long run. Are you planning to sell your property before you pay off your mortgage? Are you going to start a family soon? Will there be any predictable health issues? These will impact your income and expenses, and are necessary to consider before you go changing possibly the biggest finance loan you have.

Your monetary stream is also a major player in this scenario. Is your job foreseeable into your future? Is your pay likely to change? If you own a small business, chances are you need to consider this more carefully. You can always ask an expert for advice if you are unsure about the best avenue to take.

2. Pay more for less

Paying a larger lump sum will reduce the amount of interest that is charged by reflecting it against a lower loan balance

Waiting out a high-interest period might prevent you from having to change your mortgage situation as you never know what the next change can bring.

With a variable loan, you can make extra repayments as you wish, whereas a fixed home loan requires a fee. By getting ahead of your mortgage and paying a larger lump sum when interest rates go up, you will reduce the amount of interest that is charged by reflecting it against a lower loan balance.

While it means you currently have to release more money from your income towards your mortgage, you will be on a faster track to paying it off. There will also be fewer dollars in your loan harvesting interest.

3. Get a fixed or combo loan

An increase in mortgage interest levels means that those with a variable loan have to meet the requirement of the rising or falling rates.

This unpredictable nature might warrant some consideration, especially if rates keep going up. Depending on your loan conditions and your lender, you have the choice to change over to a different type of loan.

CEO of Westpac's Consumer Bank George Frazis states that in the last 12 months, over 70 percent of Westpac customers were ahead of their payments. However, they could assist concerned customers by offering the option of "splitting loans between fixed and variable rates and putting in place offset arrangements".

A fixed mortgage provides you with the stability of a set interest rate if you don't think your finances could cope with the changeable levels. However, making the switch at the wrong time can lock you into a higher-interest loan. It also means that you cannot take advantage of the lower rates that the future may bring.

Combo loans are also available, which allow you to fix a portion of your mortgage at a set interest percentage whilst the rest is according to the current rate of your lender. This allows for both stability and flexibility, especially if you are wanting to benefit from low rates whilst protecting your loan against higher rates.

It is worth doing your research and taking a look at all the loan options to find the one that best suits your finances, especially if you know they are likely to change.

Talk to an expert to find the best home loan option for you.

4. Try a different lender

There are many advantages and disadvantages when it comes to bank lenders versus non-bank lenders.

Banks offer a wider variety of loan options, but also possibly higher rates. They also come with government guarantees, so can provide more peace of mind when financing for a house. The Australian Prudential and Regulation Authority enforces strict requirements on banks, where they have to meet minimum capital levels.

Non-bank lenders can offer lower interest rates, but with a different mix of fixed costs that come with a loan agreement. They may also be at a higher risk in an unstable market if the lender is a smaller business.

Peer-to-peer lending is on the rise, which can be great as they offer lower interest rates to borrowers by assessing your credit risk and matching you to an appropriate lender. The banks or credit unions who act as the middlemen are removed and replaced with businesses that have lower operational costs. They also offer more flexible options for both lenders and borrowers due to the step away from traditional banking.

However, with a peer-to-peer model, this can be riskier for both lender and borrower. There is less guarantee that the lender will not require their money back quicker, nor that the borrower can meet these repayments.

Non-bank lenders do not necessarily offer offset accounts for your mortgage, meaning that interest could be applied to the complete loan balance despite the savings you accumulate. Of course, paying your loan off faster means that there will be less balance for interest to apply to. You can use a high-interest term deposit to store your savings in place of an offset account if your non-bank lender doesn't offer offset.

One extra benefit of non-bank lenders is that as they may put customer service at the top of the agenda as they rely more on reputation and customer reviews than larger banks. 

Consider a non-bank lender by doing it online - it's faster and easier than ever! 

5. Consider the consequences of change

Be aware that if you are wanting to change your loan type, there may be an exit fee.

In effect since July 1, 2010, the Australian Securities and Investments Commission (ASIC) has reduced exit fees for variable rate loans. ASIC chairman, Tony D'Aloisio, explains the guidelines surrounding exit fees - they can only reflect the losses of the lender from the borrower exiting early and the amount cannot be used to discourage a swap from one lender to another.

Also, the longer you have a loan, the less you should have to pay. This is great for those that are ready to make the jump, whether to a different loan or between lenders.

The sum of an exit fee differs with loans and lenders, so know what it'll cost you when you make a change. It is definitely something to consider when you're looking at other finance options.

6. Do your research

Research is key when looking at finance. Take advantage of online resources to bump up your knowledge when it comes to home loans.

Keep in mind that experts are only providing information from experience, and aren't able to predict the future of the Australian economy. They will be able to provide advice based on your circumstances in order to help you get the best loan possible if you wish to change due to the rise of interest rates.

Image credit: Australian money by Douglas Kelley

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