How to Navigate Interest Rate Rises
As Australian household budgets are stretched further by yet another interest rate rise, some homeowners are looking at ways to cut discretionary spending, while others are considering refinancing their home loans and shifting to lenders offering better deals. With further rate rises likely, now may be the right time to revisit spending and saving, and make small changes to reduce monthly commitments. Here’s how to navigate rising interest rates.
Refinance to a new loan
For the last 12 months, there have been 6 interest rate increases, adding another 150 basis points and bringing the official cash rate to 4.35 percent. Variable home loan rates are expected to follow, with rate rises impacting millions of Australian homeowners with higher mortgage repayments.
For homeowners, the question of whether to refinance ahead of further interest rate rises is an important one. While low-interest rates remain, this may be the best time to consider refinancing and take advantage of deals offered by lenders to help save on loan repayments. Refinancing may also bring other benefits, such as cashback offers, redraw facilities, or access to home equity.
To help you decide, here are some of the wins and what to think about when refinancing:
Wins:
- Refinancing to a new lender to take advantage of lower interest rates will reduce your monthly repayments and help pay off your home loan much faster.
- Refinancing to access the equity in your home loan may free up cash to use to renovate, re-invest, buy a new car, consolidate debt or pay for unexpected expenses.
- Refinancing to increase your loan term may reduce your mortgage repayments while refinancing to shorten your loan term means you’ll pay less interest over the life of your loan.
What to think about:
- Remember to factor in fees charged by lenders, such as exit, valuation, application, and break fees when comparing how much interest you could save.
- If your equity is less than 20% of the property value, you may be required to pay Lenders Mortgage Insurance (LMI) when you refinance.
- Refinancing your home loan too often could impact your credit score, possibly making it harder to get lower interest rates on future applications.
It’s worth discussing refinancing with a mortgage broker to find out if it’s the right option for you.
Cut discretionary spending
Many Australian homeowners had never experienced an increase in the cash rate before the RBA began raising interest rates earlier this year. But with more interest rates predicted, many are now rethinking their spending habits and considering ways to cut discretionary spending and reduce high-interest debt.
Cutting back on expenses like Netflix or gym memberships is one option for saving money, while consolidating credit cards, personal loans and car loans into a single loan with a lower interest rate may be another way to save on high-interest debt. Here are some more practical tips for getting your finances on track, as well as 3 financial rules of thumb worth following.
Start small but start saving
As rising interest rates and the cost of living mean budgets are stretched even further, building a rainy-day buffer becomes more important than ever. Start by saving small amounts, adding these to an offset or separate savings account. That way you can still access the cash when you need it, but you’ll earn interest on your savings in the meantime.
Book a financial health check
Another way to see if there is an opportunity to reduce your monthly commitments is to book a financial health check with your mortgage broker. Having your mortgage review your finances could highlight areas where you may be able to save and help you decide whether refinancing is right for you. Contact a mortgage broker to book a financial health check today.