It’s the situation we all knew was coming: rising mortgage interest rates. For many years, Australian mortgage holders have enjoyed the luxuries of ultra-low interest rates, which include:
- Low, comfortable repayment amounts
- The ability to repay more, sooner (and potentially save *years* of future repayments)
- Higher cash flow and profit from investment properties
- And in some cases, improved purchasing power to be able to buy more properties, faster
However, since the Reserve Bank started increasing the cash rate earlier this year, and lenders began to follow suit by increasing their mortgage interest rates, many borrowers are starting to feel an acute pinch in their back pocket.
With the media portraying this topic as “stress-inducing” and “life-worsening”, it is important to remember that this situation isn’t all doom and gloom. As a nation, we’ve survived interest rate increases before. And so, in this week’s article I want to walk through some of our best strategies and tactics for helping you avoid “repayment shock”, keeping a positive mindset, and (in some cases) helping you reduce the overall life of your loan(s).
Please note, these are generalised strategies and tactics only, and may not be ideal for your unique situation. As always, please speak with us directly for more information specific to your unique situation.
Like anything, planning for best- and worst-case scenarios will improve your preparation for those events.
Consider planning (a) the effects of a rate increase and (b) your response to those effects. For example, map out what your repayments will be if rates rise by 0.5%, 1%, 2%, and 3%. And then work backwards to ensure you have steps in place to meet those repayments.
Often you’ll find that the situation won’t be as bad as you expect it to be.
Speak with us if you’d like help with this modelling. In some cases, we may be able to recommend a more suitable loan(s) or loan structure for you, too.
Switching some or all of your loan amount(s) across to a fixed rate will provide you with certainty around repayment requirements for the duration of the fixed term.
Again, speak with us if you’d like to see some options for your unique situation (or if you have a complex lending environment with cross-collateralisation etc.).
An offset account allows you to reduce the amount of interest you are charged on your principle, and provides you with a “buffer” against higher repayments.
If your loan has an offset account, consider placing funds into it to “offset” the amount you owe (and therefore reducing the interest you pay).
If you don’t have an offset account, see point #4.
Reducing your principal will obviously reduce the interest that you are required to pay.
Making extra repayments before any interest rate increase will provide a stronger buffer against future increases.
Temporarily reducing your discretionary spending (ie. life’s little luxuries) will free up cash for your offset account (or extra repayments if you don’t have an offset).
Additionally, aligning your spending behaviours within a pre-determined budget each month will also give you a greater sense of control over the situation. More money in your offset (or making extra repayments) will better insulate you from rising rates.
Generally, Interest Only (“IO”) loans have a higher interest rate. You may want to consider switching to Principle & Interest (“P&I”) instead. Speak with us for more information about this.
It’s easy to assume that you already know ‘as much as you need to know’ about your lending environment. I invite you to speak with us to chat about your unique situation, because:
- We have access to loan products that you may not
- We can advise strategies that you may not be familiar with
- We may be able to reconfigure complex loan environments to better insulate you from interest rate increases
Can We Help With Your Property Journey?
If you’re looking for an expert team to help insulate you against rising interest rates (or you just want someone to ‘tune up’ your lending environment), request a Free 30-Minute Finance Strategy Session during which you will…
- Gain greater clarity over where you want to be in terms of owning investment properties (and how to structure your loans to get there the fastest, safest way)
- Discover how to unlock the equity in your current properties, so you can build your portfolio – and your wealth – faster (and enjoy a better lifestyle now and in retirement)
- Discover clever, no-cost ways to save money on interest, fees, and charges — immediately
- Get an up-to-date picture of the lending landscape including rates, conditions, and how to structure loans for cashflow positive investors
- Learn about our process to find you a better loan that will save you thousands.
This no-obligation session will be held with one of our experienced mortgage brokers.
Please be assured this will not be a thinly disguised sales presentation. On the contrary, you’ll receive our best strategic advice, specific to your situation, so you too can accumulate multiple properties without sacrificing your current lifestyle and accelerate your progress towards wealth.
Please note, the numbers and assumptions listed in this article are for educational purposes only. Individuals should seek specific advice pertaining to their unique situation and the real estate market before making any decisions.
Trilogy Funding Two is a corporate credit representative (Representative Number 506131) of BLSSA Pty Ltd, ACN 117 651 760 (Australian Credit Licence 391237)