You don’t have to be at the mercy of interest rate increases. Here are some tips that can help you beat interest rate rises.
1. Consider higher rates when you are working with your budget. You must plan for hikes in interest rates before it actually happens. Work on a detailed budget according to present rates and according to rates that are two percent higher. If your projected budget with two percent higher rates is not enough for your current budget, you must trim down on expenses.
2. Borrow less. Calculate first what you can pay for while taking into account upcoming rate increases. Save as much as you can and place unexpected payments like tax returns and dividends into your home loan account. Every dollar borrowed means more interest paid.
3. Consider switching from a standard to a basic home loan. This move alone can trim your interest rates by 0.5 percent. However, keep in mind that the basic home loan is not as flexible as the standard loan and extra repayments might not be allowed.
4. Avoid honeymoon periods because there might be hidden costs. If you want to refinance from a honeymoon loan during the early years of the term, you might be hit with high exit fees. The standard variable rate that the loan reverts to at the end of the honeymoon home period so you might pay dearly for your discounted year.
5. Make extra repayments right from the start. Having a $50 extra repayment on a $100,000 variable home loan can trim a few years off from your loan term. This move can also save you thousands of dollars in interest costs. Also, it would be better to give extra repayments from the get go instead of suddenly adjusting your budget during rate hikes. Extra repayments would also offset with the principal loan amount which can help you increase your property’s equity.
6. Another way to beat interest rate rises is to pay for up-front charges such as legal costs, valuation fees and loan establishment fees to trim down the total amount of the loan. You can also have a separate account that will pay for up-front fees especially if you are saving for the deposit.
7. Taking a fixed home loan can also help you fight interest rate hikes. Though the right time in fixing your home loan is gone, you may still put a part or your entire loan as fixed.
8. Consolidate your debt, too. Since rates are going up, most variable interest rates will go up as well. If you consolidate your debt, you will end up paying a lower interest rate as compared to paying 15 percent per interest for your car loan or credit card.
9. Fortnightly repayments can also help pay your loan term at a faster rate. Shifting into this repayment frequency option can also cut your interest rates for it can reduce the principal amount.
10. Finally, you can use the redraw facility to your advantage. In times when interest rates are low, you must puit any spare amounts in your salary into your loan account. Doing this will give you a buffer against potential rate hikes and financial security by redrawing the amount that you paid during tough situations.
