#44 Borrow Smart Series – Interest Rate Rises: How They Affect Your Mortgage Repayments

Rising Interest Rates and Your Mortgage: What You Need to Know.

In today’s dynamic economic environment, understanding how interest rate changes can affect your mortgage is crucial for effective financial planning. Whether you’re a current homeowner or looking to enter the property market, being aware of how rising interest rates impact your mortgage repayments can help you make informed decisions. Let’s explore the key considerations and strategies to manage interest rate fluctuations.

The Impact of Rising Interest Rates on Mortgages

When interest rates rise, it can have a significant effect on your mortgage repayments, particularly if you have a variable rate loan. Here’s how different types of mortgages are affected:

Variable Rate Mortgages

Variable rate mortgages are directly impacted by interest rate changes. When the Reserve Bank of Australia (RBA) increases the cash rate, lenders typically pass on this increase to their variable rate customers. This means:

• Your monthly repayments will increase
• The total interest you pay over the life of your loan will increase
• Your borrowing power may decrease if you’re applying for a new loan

For example, a 0.5 percentage point increase on a $500,000 loan could mean an additional $145 per month in repayments, or $52,034 over the life of a 30-year loan.

Fixed Rate Mortgages

If you have a fixed rate mortgage, you’re protected from interest rate rises during your fixed term. This means:

• Your repayments remain unchanged for the duration of the fixed period
• You have certainty in your budgeting and financial planning
• However, you won’t benefit if interest rates decrease

It’s important to note that once your fixed term ends, your loan will typically revert to a variable rate, which may be higher than when you initially fixed your loan.

Rate Lock: A Strategy for New Borrowers

For those about to settle on a property or refinance, a rate lock can be a valuable tool in a rising interest rate environment. Here’s what you need to know:

• A rate lock allows you to secure the current interest rate for a set period, typically 60 to 90 days
• It protects you from rate rises between when you apply for your loan and when it settles
• There’s usually a fee for this service, often around 0.15% of the loan amount
• If rates decrease during this period, some lenders will allow you to access the lower rate

Consider a rate lock if:

• You believe interest rates will rise before your loan settles
• You’re on a tight budget and need certainty about your repayments
• The cost of the rate lock is outweighed by the potential savings if rates increase

Strategies for Managing Rising Interest Rates

1. Review Your Current Loan: Regularly compare your loan with other offerings in the market. You may find a more competitive rate by refinancing.
2. Consider Fixing Your Rate: If you’re concerned about future rate rises, fixing all or part of your loan can provide certainty.
3. Make Extra Repayments: If possible, pay more than the minimum required. This can help offset the impact of rate rises by reducing your principal faster.
4. Use an Offset Account: Keeping your savings in an offset account can reduce the interest you pay on your loan.
5. Speak to Your Lender: If you’re struggling with repayments, contact your lender. They may be able to offer hardship provisions or restructure your loan.

The Role of Your Mortgage Broker

Navigating interest rate changes can be complex, which is where a mortgage broker can provide valuable assistance. A broker can:

• Help you understand how rate changes affect your specific situation
• Compare different loan products and lenders to find the best deal
• Advise on whether fixing your rate or using a rate lock is appropriate for you
• Assist with refinancing if it’s beneficial for your circumstances

Conclusion

While rising interest rates can be concerning for mortgage holders, being informed and proactive can help you manage their impact. By understanding how different loan types are affected, considering strategies like rate locks, and working closely with a mortgage broker, you can navigate interest rate fluctuations more effectively.Remember, every borrower’s situation is unique. What works for one person may not be the best strategy for another. That’s why it’s crucial to seek personalised advice from a mortgage professional who can help you make decisions based on your specific financial circumstances and goals.Stay informed, review your options regularly, and don’t hesitate to seek expert advice. With the right approach, you can manage the challenges of rising interest rates and keep your homeownership dreams on track.

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