If you have a mortgage, the mere mention of interest rates is enough to make your blood pressure go through the roof.
To an extent, overwhelming emotions in the current financial climate come from having a lack of control. An era of low, carefree mortgage rates would appear to be behind us, at least for the moment.
So, how can we mitigate the pressure that rising interest rates put on our financial future? Find out as we show you how to get clever in an attempt to turn interest rate hikes to your advantage.
Crunching the Numbers
Property prices have yoyoed dramatically over the past few years. Average values rose almost 30 per cent from September 2020 to April 2022. They then fell back by almost 10 per cent in what experts refer to as the biggest and fastest downswing since records began.
However, that means prices are still far higher than they were just a few years ago. Throw in the rapid rise in interest rates over a matter of months and it’s not hard to see how our wages are getting ever-tightly squeezed.
Where You Buy and How Much Deposit You Can Afford
It’s all about location. Sydney, Canberra and Melbourne consistently make the top 3 most expensive cities to buy property. Brisbane, Hobart and Adelaide tend to follow with Perth and Darwin hovering at the bottom.
The variations in prices between these locations are huge. A property in Perth can typically be 2.5 times cheaper when compared to a similar home in Sydney, for example.
Let’s take a home with a value of $600,000 as an example. You’ll need a 20 per cent deposit of $120,000. Your monthly repayments could be just under $3000 and your annual salary would need to be around $120,000 to avoid any mortgage stress.
(Figures based on principal and interest repayments over 30 years and on the average owner-occupier variable rate of 5.94%)
It’s likely to take at least 10 years or more to save the deposit to buy a home, and that’s if nothing major happens in the meantime. Many properties will cost even more making them unaffordable on the salaries many Australians take home. That’s unless they get help from the bank of Mum and Dad.
The bad news is that there’s no guarantee that interest rate hikes will come to an end in the near future.
Going on the Offensive Against Interest Rate Hikes
Eyewatering figures continue to swirl around property prices, rising interest rates and monthly repayments. It’s little wonder then that many young people view owning a property as a non-starter.
There are ways to try and beat down spiralling costs by donning your fighting financial armour and hacking your way through the quagmire of grim forecasts. Here are ways to help ease the frequent interest rate hikes and rising mortgage repayments:
1. Make Extra Repayments
You can cut your loan by several years if you make extra payments on your mortgage. Putting a bonus, windfall or tax refund can equate to savings in the interest of thousands of dollars of hard-earned cash.
Take a typical long-term principal and interest mortgage of 25-30 years. Payments during the initial 5 to 8 years tend to go towards paying down the interest. Anything extra you put into the pot during that period will reduce the level of interest you pay and shorten the length of the mortgage term.
2. Switch to Fortnightly Repayments
If you’re paying off your mortgage monthly, think about switching to making repayments every 2 weeks. By doing this, you’ll pay off your mortgage faster by making the equivalent of an extra month’s repayment every year.
How does this work? There are 12 months to a year but there are 26 fortnights because not all calendar months are 28 days long.
3. Check if You Can Get a Lower Interest Rate
It sounds obvious but many borrowers don’t do it and miss out on great offers. Take a look at your current mortgage and decide which features of it matter to you most.
If you see a more favourable rate for a similar mortgage elsewhere, ask your current lender to match it or offer you a cheaper option.
4. Switch to a New Lender
Carry out your own research and work out whether there are any lenders offering more competitive interest rates. Bear in mind that there are likely to be costs involved with refinancing but it can be worthwhile in the long run.
Other motives for refinancing could be:
- To open up an offset account
- To switch from a fixed rate of interest rate to a variable rate
- To consolidate personal loans and credit card debt
- To get better loan terms and an improved customer experience
- To get hold of some cash by releasing equity from the property
5. Open an Offset Account
This can be a real interest rate buster. It works like a bank account linked up to your home loan balance. Any cash held in this account offsets your home loan amount. That means you’ll get charged less interest overall.
Imagine you have a $500,000 home loan with $40,000 in your offset account. You’ll simply pay interest on the first $460,000 of your home loan. As long as you keep money in your offset account, you’ll reduce the amount of interest paid on your monthly payments.
Offset accounts tend to have monthly or annual fees, so it’s crucial to work out if the interest savings will outweigh the costs involved. Many lenders don’t offer offset accounts to those with fixed-rate mortgages, it’s a major perk of going variable.
6. The Pitfalls of Interest Only Loan
These can work well if you have multiple properties or large amounts of equity in a property. The monthly repayments will seem like a drop in the ocean compared to those where you’re paying off both principal and interest.
An interest-only mortgage is exactly as it says. That means you’ll never be paying off any of the principal part of the loan. In that sense, time stands still, meaning you’ll end up having paid a mass of interest with little else to show for your payments over what could be a substantial length of time.
Securing a Better Financial Future
PAC Financial is on hand with a range of financial services to help you get on top of rising interest rates. Get in touch today to find out we can help you beat interest rate hikes.