5 Ways to Manage Rising Interest Rates

Interest rates are on the rise and that is causing enormous concern amongst home owners everywhere.  If you are a borrower and have a variable rate home loan then it is important that you reassess your budget as soon as possible and take some form of preventive action.

It appears the Reserve Bank of Australia is determined to raise rates as far as necessary to handle the effects of the so-called “mining boom” that is currently taking place. This has serious consequences for home-owners and means that everyone should take stock of their current financial position and examine what needs to be done to cope with rising interest rates.

Given that most people’s largest debt is their home loan it makes sense for them to look at their current facilities to make sure that their existing loan is suitable in an environment of rising rates. If you are a home owner with a mortgage and have any doubts that you are not prepared to handle ongoing rises in interest rates the following suggestions will give you some ideas to act on.

The following are the best 5 ways to deal with rising interest rates:

1. Get a home loan health check.

Make sure you speak to your broker regarding getting them to check that your current loan is the most suitable, given your present circumstances or if there are cheaper options available. It may be that there are other loans that have a cheaper interest rate and/or lower fees that you can refinance to. Ensure that you look at the costs involved in changing loans so that any change means that you will save money.

2. A fixed rate loan may help.

If you are seeking peace of mind and are not too worried about the repayment amount then a fixed rate loan may be the best option.  It is important to realise that current fixed rates are about 1% higher than variable rates and you do not get as many features with this type of loan.

3. Reduce the loan amount in one quick move.

If you have access to a lump sum then paying it into your home loan and getting your lender to adjust your mortgage payment is a very good strategy. This will save a large amount in interest paid over the life of the loan.

4. Change your repayments.

Changing your repayments from principal and interest to interest only may be a good short term measure.  This should only be done for a limited period of time, say a maximum of 1 year.  The disadvantage with this strategy is that when you go back to principal and interest payments they will be increased to take into account the period when the principal was not being repaid.

5. Extend your loan term.

Increasing your loan term will allow you to reduce your monthly mortgage payment. This is not an ideal strategy as it will increase the total amount of interest paid over the life of the loan. But if you need to reduce mortgage payments to meet your budget it can be a very helpful option.

If you wish to discuss any of these options or anything else to do with lending please give Andrew Patterson, Principal of SCA Finance, a call on 92408858 (office) or 0409 119 322 (mobile).

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