Four Tips to Survive Interest Rate Rises
Once you have taken out your home loan, you may find yourself living on a knife edge with constant reports in the media forecasting interest rate increases, every month that the Reserve Bank meets. The Reserve Bank has the responsibility to use its monetary powers to keep inflation under control and one of its tools, in order to achieve this, is that of raising or lowering interest rates.
Finding the Right Loan is Crucial
It is hard on the nerves of many home buyers during times of rising interest rates but it is arguably much harder during the periods when the media continually forecast rate increases when, in fact, there is never such an intention to do so. To help ease the stress you may need some help from appropriate Tips and Guides to assist you in handling all such occasions.
During inflationary periods, when interest rate increases are real, many home buyers find they are compensated with wage increases that tend to ease the pain somewhat. This is all part of inflation but that doesn’t take away from the need to read up on some Tips and Guides to help you through such a period.
The Australian Securities and Investment Commission (ASIC) is fully aware of the stress imposed on home buyers during time of rising interest rates as well as periods when you are constantly being reminded that interest rate increases are imminent. For this reason ASIC have produced four Tips and Guides to help you better handle such situations:
- Probably the most important thing to do first up is to create a budget and stick to it. This is good advice even if you are not concerned about the effects interest rate increases will have on your own bottom line. One of the most effective budget planners available can be obtained on the ASIC web site ‘FIDO’ at www.fido.gov.au . The FIDO budget planner helps you sort out your expenses from your income by calculating your weekly, fortnightly or monthly surplus or deficit.
In order to use your FIDO budget planner to your best advantage you will need to have either your payslip or taxation return with you at the time as well as any other record of income. You will also need an array of bills, shopping dockets, accounts, credit card and bank statements handy so that you can calculate your spending over the past 12 months. Remember when doing all this to use your after tax income – not your pre tax income.
Ignore any irregular income that you would not normally expect to be repeated like overtime or bonuses that are ‘one offs’. Calculate your income and expenses for the period you have chosen be it a week, fortnight or month, depending in your pay periods. You will find the FIDO budget planner has a handy converter that can calculate annual and quarterly payments into weekly fortnightly and monthly amounts. Check your payslips for any non-tax deductions such as superannuation payments, health insurance, company car etc. To be even more accurate you can add these amounts back onto your income and then include them in your expenses. When you run across income that has not been taxed you should deduct your estimate of tax due before entering these amounts as part of you income.
Look for things that you consider you need, the essentials such as food and housing. Separate these essentials from the things you would like to have or simply want. This is the area you will be able to cut back on, things that you can do without if you have to. Be careful here that you don’t go too far because if you cut your budget too much you will find it too tight and most likely finish up discarding it sooner or later.
- In cases where you make regular payments, such as car repayments, mortgages, white goods, technology, furniture etc. it is usual to make these payments on a monthly basis. Examine all such agreements to see if you can change these repayment to a fortnightly repayment regime. In this way you will be able to make the equivalent of 13 monthly repayments a year instead of the normal 12 monthly repayments. This method will cut four years off a 20 year home loan of $200,000. If you can manage an extra $100 above your minimum repayment every fortnight you will cut seven years off your loan.
- If your home loan repayments are already too expensive and this is what is worrying you if interest rates should rise further, you can consider switching home loans. When considering this move make sure you carefully take into account the costs of doing so. These costs include such things as termination or break fees and the lenders legal fees. You will find much assistance here on ASIC’s web site at www.fido.gov.au/switching.
There are many sound reasons why you should switch your home loan to another home loan provider, look for better credit card deals or change your superannuation fund, some of these benefits can be:
- Consolidate all your financial dealings under one or two umbrellas.
- Take advantage of an attractive offer that could save you money.
- Better interest rate.
- Improved features.
If you feel you must switch look around for the better deal. Check the cost of doing so and convince yourself that it is potentially worth your while. You home loan is probably the biggest financial commitment that you will make in your entire lifetime. Movements in interest rates can have quite a big impact on how much you can pay back every month which in turn effects how much interest you pay over the term of the loan. In switching home loans you can save thousands of dollars in interest and take advantage of improved features made available to you by another home loan provider.
If the fees are too high however it may not be in your financial interest to switch over. It may be better to wait and make the switch at a later date. Ask yourself if the cost of switching is worth the potential saving in interest rates.
- If you are having trouble keeping up with your present mortgage repayments don’t hesitate to talk to your current lender in the first instance. All banks, credit unions and building societies will have signed up to the Australian Governments principles to assist people in financial difficulty. Under the Consumer Credit Code, if you are financially unable to meet your loan repayments because of some temporary financial hardship that has been brought about by unemployment, sickness or any other reasonable cause, you may have the right to reduce and spread your repayments over a longer term. If necessary your repayments can even be halted for a temporary period. This right is given to an individual consumer but not to a business borrower. If your particular lender won’t agree you can make application to the Court of Tribunal that is set up to hear hardship cases in every state and territory. You must however be able to show that your proposal will allow you to continue repaying the loan if your arrangement is agreed to.
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