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4 things borrowers need to consider in a high-rate world

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With rising interest rates and cost of living, being prepared before you borrow is more important than ever. We show you the key things you need to know.

Sponsored by Unloan. The first home loan with an increasing discount.
With Unloan, you don't just start with a low variable rate — you also receive an extra 0.01% p.a. discount every year for up to 30 years. This article is part of our Borrower Support series.

Since May 2022, there have been a whopping 10 cash rate rises. For those with home loans, it's been a tough time, with many seeing a significant increase in their monthly repayments.

Now, this doesn't mean there aren't opportunities for Australians looking to get a foothold in the market or expand their portfolio.

But it does mean that if you're a current borrower – or looking to borrow in the near future – you need to weigh up a few different factors.

So we've put together some of the key things to think about for anyone considering a home loan.

👋 Hey there! Since we've partnered with Unloan, we'll be using some examples from its products in this article. But always compare your options and do your research. Make sure that you also read the product disclosure statement (PDS) and target market determination (TMD) before signing up for any financial product.

1. Refinancing

For borrowers who already have a home loan, the high-rate environment makes refinancing quite appealing.

Given the rise in interest rates – and the fact that many fixed-rate periods are coming to an end in 2023 – there are a lot of borrowers currently considering refinancing.

The advantages seem obvious. Get a better interest rate, add new features to the loan and possibly score cashback along the way.

Depending on how much equity you currently hold in your home, it can be a good solution for bringing down your repayments and also reducing the overall lifespan of the loan.

There are a number of digital lenders who are catering to these types of relatively straightforward refinancing situations.

However, it's also important to consider a couple of other factors too.

High fees and switching costs can be a common barrier to refinancing. However, some lenders are starting to buck this trend.

One example is Unloan. It doesn't charge fees for refinancing* and aims to reward lender loyalty. For each year you stay with Unloan, it offers an annual rate discount on your interest rate.**

Also, as rates are higher now and property prices have dropped a bit, some borrowers may have less equity than they think and may actually struggle to get a loan approved.

It may be worth checking your borrowing power before submitting a refinance application.

2. Long-term affordability

Your borrowing power is dictated by a variety of factors, including your savings, your current income, your credit history and wider market circumstances.

So when it comes to buying a house, many prospective borrowers realise that they can borrow quite a bit more than they may have anticipated.

But this doesn't mean borrowing as much as possible is necessarily a good idea.

As we've seen throughout 2022, interest rates can fluctuate quite a bit! So a loan that's affordable by stretching your finances can become totally untenable if the loan rate rises.

So whether you're looking at borrowing for a new property or refinancing an existing one, it's very important to factor interest rate rises into your budget.

It's also important to make sure that you're factoring in the rises in the cost of living into your budget too. What may have been affordable a couple of years ago isn't necessarily affordable in 2023.
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3. Savings options

The rises in the cash rate from the RBA have largely been discussed in negative terms, and perhaps understandably so. In addition to the rising repayment expenses, it's helped fuel a rise in the wider cost of living.

However, there are some upsides. Savings accounts are now offering higher interest rates than they have in years, making it far easier to accrue interest – and in turn, build up capital for a deposit.

Of course, there is always an age-old discussion about whether it's better to save for longer or take advantage of the market now.

There isn't really a catch-all answer – as with anything related to finances, it really depends on your individual circumstances.

A loan that offers redraw – such as those from Unloan – can also be an effective way to maintain access to cash when necessary, too.

Tools like LMI and government schemes can make it easier to get on the property ladder without significant savings. But there are always people who like to opt for a more conservative approach to borrowing – building up savings in order to avoid longer repayment periods.

So if you've been thinking about looking at better ways to save, now may be the time to shop around for a new long-term savings account.

4. Falling property prices – and the right time to buy

One of the prime attractions in purchasing property at the moment has been the overall lowering of property prices.

Many Australians are considering whether now may be a good time to buy, given the traditionally sky-high pricing in the market.

Now, there is a lot of press taking the stance that this fall in prices has been offset by a rise in interest rates – but in truth, it's very dependent on individual circumstances.

There are still lenders offering reasonable rates, and provided you don't borrow too much, it's still possible to balance repayments with the rising cost of living.

Although borrowing power may have potentially decreased, the "rules" for borrowing also remain much the same. Being able to demonstrate consistent patterns of saving and repayments, a good credit score and a steady income can all still enable borrowers to secure a loan.

It's also worth considering before you buy whether you're looking at a foot on the property ladder or your dream home. Too often, these get conflated – but having a property in place can actually be a gateway to getting your dream home further down the line.

If you're unsure how to proceed, speaking to a financial professional can allow you to get outside advice on your circumstances. In turn, this can help you form a more holistic view of your circumstances before making your next move.

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