How to beat interest rate rises

Rates and Fees verified correct on December 9th, 2016

Don’t get caught out paying excessive interest on your home loan. Learn how to beat interest rate rises regardless of what the RBA decides.

Regardless of the type of home loan you have - whether fixed or variable, interest rate rises will inevitably have an impact on your hip pocket.

But even if factors within the economy and the RBA cause rates to rise, there are a number of ways to ensure you’re getting the best deal possible.

Refinancing tactics

Refinancing icon

Refinancing is a great way to protect yourself from interest rate rises. The home loan market is very competitive, so chances are your loan isn’t the cheapest you could get.

If you’re looking for something more affordable, make sure you compare the interest rate. The lower the interest rate, the less interest you will have to pay and the lower your repayments will be. Remember that this may involve sacrificing other additional features that come with a more comprehensive home loan, so ensure you know which features you’re happy to lose and which ones you want to keep.

Another good strategy is to lock in a fixed rate. Fixed rate home loans allows you to secure an interest rate for a number of years. Fixed rate loans provide the ultimate protection against interest rate rises because your rate won’t change with interest rate fluctuations. These loans also allow you to better understand and plan for your repayments as they are the same throughout the duration of the fixed term. This provides a lot of security and certainty; however, the risk is that it won’t give you savings if interest rates fall.

Also, with most fixed home loans, you can’t make additional repayments unless specified by your financial provider. There’s also less flexibility with loan terms and potentially large break fees if you choose to exit your loan before the term ends.

Overpayments

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Another way to beat interest rate rises and save money is to make extra repayments now before rates rise, giving you a head start. Before making extra repayments, you must first ensure that your lender will allow you to make additional repayments—some loans won’t allow you to or will have some restrictions in place as to how much extra you can pay.

Extra repayments will require you to make additional repayments beyond your minimum required amount. If you make repayments every month, a good idea may be to make bi-monthly repayments where possible to help you in paying off your loan quicker. Because there are 26 fortnightly payments in a year, you in effect make an extra monthly payment each year, saving you thousands over the course of the loan.

Making larger repayments means you won’t be disadvantaged and in trouble if interest rates rise later. Making larger than necessary repayments will shorten your loan term and means your repayments won’t get bloated if there’s an interest rate rise later on down the track. Not everyone is in the financial position where they can make extra repayments but whenever you can, it’s recommended you do.

Offset accounts

Offset account

A mortgage offset account is when a regular transaction account is opened up and is linked to your mortgage. You can deposit money into your account, carry out transactions and withdraw when you need to. Each dollar that remains in your offset account reduces the amount of interest you pay on your home loan. For example, if you have $5,000 in your offset account and your home loan balance is $50,000, you will pay interest on $45,000 rather than the $50,000. This significantly reduces the interest you have to pay over the duration of your home loan.

Establishing an offset account is a potential way to protect yourself against rate rises as it ensures you are effectively paying less interest. On top of paying less interest, offset accounts are also a great way to help you pay off your home loan much quicker. If your home loan doesn’t have an offset account, it may be helpful to compare loans which do.

Offset accounts are generally only available on full-featured variable home loans which may have higher fees and rates than a basic home loan. It’s also important to look out for any potential account-keeping fees which may be charged on your offset account.

Other ways to beat interest rate rises

Borrow lessTo beat interest rate rises it may be worthwhile borrowing less. Before you settle on a home loan, consider how much you need to borrow and take into account the affordability of the loan including any future interest rate rises or fees and charges. Don’t borrow more than you need to—the less you borrow, the less interest you will need to pay on your home loan. Save the largest deposit you possibly can before entering into a home loan.
Plan for higher ratesAlthough no one really wants to think that they will be paying higher rates down the track, it’s definitely something you need to think about upfront and be realistic about. Use your repayment calculator to see what your repayments would be in the event that rates went up 1%, and then 1.5%. This will help you to put a plan in place in the event that this ever happens.
Split your loanAlternatively, splitting your loan may also assist you in beating interest rate rises. You can split your home loan between a fixed rate and a variable rate just in case things take a turn for the worse. A split loan can give you the peace of mind of a fixed interest rate does while still letting you take advantage of any lowering of the interest rate.
RedrawTaking advantage of your redraw facility can also assist you. While rates are low, consider making extra repayments and redraw these funds if you need them later.

Interest is the largest associated expense of your home loan, so take away the stress with the best ways to beat interest rate rises. Save money over the length of your home loan with these tips. Don’t let interest rate rises put you off, start comparing all the home loans available to you today. You may also want to check our home loan calculators to get a better idea of your borrowing situation.

Marc Terrano

A passionate publisher who loves to tell a story. Learning and teaching personal finance is his main lot at finder.com.au. Talk to him to find out more about home loans.

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