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Rising interest rates and your mortgage

Wilson Luna

The question was never whether interest rates were going up -  the question was when. Now that the economy is showing some signs of recovery the Reserve Bank of Australia has indicated that rates could continue to rise in the near future. Governor Stevens a few months ago warned that mortgage holders should factor in rises of up to 2% in the next year and punters are putting their bets down on another 0.25%pa increase after the RBA board meets in November.

So what can you do to prepare yourself in the case of further rate rises? After all for most people a mortgage will be the most significant expense a person will have in their lifetime. 

Step 1: Shop around and review your mortgage

Keep an eye on home loan lenders. Over the next few weeks banks and mortgage lenders will be deciding whether they will be passing on the rate to customers this time around. If you have not reviewed your loan for a few years now is a good time to check if you are sitting on a good deal. Draw up a table listing the interest rates, fees and features of your current loan and a few other potential home loans. Talk to your current lender and tell them you are planning to switch to a cheaper loan offered by another lender. They may suggest an alternative loan for you at a cheaper rate or offer to reduce the interest rate in order to keep your business.

Step 2: Work out the costs of switching

Add up any exit fees that will apply if you move from your current loan, and the start up fees of the new loan. This is the cost of switching. Ask yourself if the benefits of switching are worth the costs. You now have the facts before you. Make your decision by comparing the costs of switching with the benefits of switching. 

Step 3: Decide whether it’s best to fix your mortgage now or keep it variable

A variable interest rate means your lender can increase or decrease this rate to match general changes in interest rates. Fixed interest loans are loans where the rate remains unchanged for an agreed number of years, however the interest rate is usually a little higher than for variable loans. Choosing whether or not to fix is a personal financial decision and you should carefully weigh up the pros and cons before making a decision.

Fixed rate - the pros:
• A fixed rate will allow you to budget so you know exactly what your repayments will be for the duration of the fixed term. The certainty that this gives you can be important if you feel your budget is already stretched to its limits.

• If interest rates rise during your fixed rate term, your repayments won't be impacted.

Fixed rate - the cons:
• If interest rates are cut you won't benefit by the drop.

• If you decide to move back to a variable rate before the term finishes you may have to pay a breakage fee.

• A breakage fee may also apply if you pay off your mortgage early or re-mortgage.

Variable rate - the pros:
• Over time the total cost of a variable interest rate loan is generally cheaper than for a fixed interest rate loan.

• If interest rates drop your repayments will also drop.

Variable rate - the cons:
• It is not possible to predict what rates will be in the future. This means your budget should be able to cope with any interest rate rises that might happen.

Where is the money going to come from to fund the higher repayments? If its been a little while since you last looked at your budget, now its time for that review. Check where you could make some adjustments and remember to leave a buffer for future increases in repayments during 2010.

Higher interest rates may be on the cards for 2010 however the great news is that many Australians have used this period of record low interest rates to pay down debt through debt consolidation or by simply keeping up the higher repayments to help them pay down the principal. This cautious attitude has left many families well prepared for a change in the economic climate.

If you liked this article you might also be interested in these articles about property and mortgage advice:

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Author's Biography

Wilson Luna is an author, wealth adviser and founder of Your Family Your Money. Your Family Your Money’s goal is to simplify traditionally complex financial strategies, demystify financial jargon and debunk common financial myths, becoming every family’s first stop for financial advice, information and inspiration.