Surviving an increase in mortgage rates

By Peter Boehm

As anybody with a mortgage knows, official interest rates are up - leaping 0.25% to 3.25%. In all likelihood, there'll be two more rises before Christmas. If the market's view is correct, mortgage rates will be 1% to 2% higher a year from now.

It's true that interest rates have been at near-historic lows, but a 1% to 2% increase is a sizeable leap in anyone's book. (And it might be even higher if your mortgage company decides to lift its rates of its own accord).

If you have any form of debt (from a mortgage to a car loan or a credit card) this is obviously bad news: increased rates mean increased borrowing costs, less cash in your wallet and more stress on your budget.

So what can you do when interest rates rise?

Understand your finances

To properly understand how a rate rise is going to affect you, you need to know how you're spending your money and where. It's important to prepare and keep track of your household budget. List your essential expenses (items such as medical, food and home loan payments) and your optional expenses (meals out, movies and vacations) separately. (For help see Five Steps to Creating Your Budget).

With your budget worked out, you'll begin to see how you're going to cope under an interest rate increase. If you've got a mortgage, calculate what your repayments will be if rates go up by 1% to 2%. If there's room in your budget, you're in the clear. If there isn't, you'll need to make some cuts. Start by eliminating your discretionary spending. If that doesn't look like it will save you enough, start to think about ways you can lower your essential costs - perhaps by choosing to buy generic brands. If it's still not enough, consider how you could supplement your income. Perhaps you could ask for a pay rise, or take on a second job?

Be clever when it comes to debt

With interest rates on the rise, now is also the time to start thinking about the kind of debts you have, how expensive they are, and how you can lower your exposure to rate increases.

Consider consolidating your debt or speeding up your repayments - anything that can lower the interest expenses associated with your loans.

A home loan ‘health check' is also a good place to start. You might decide to fix all or part of your loan in exchange for more payment certainty, or you could open an offset account that allows your spare cash to reduce the total interest on your loan. One good way to save a little bit extra on your mortgage is to put your mortgage repayment and salary payments in sync. This means that if you're paid weekly or fortnightly, you arrange to have your mortgage paid the same way. By doing so, you can reduce your overall interest costs and increase the power of your cash.

With rates headed up, also realise that the power of your spare cash goes up as well. If it's sitting in your regular, low-interest bank account, then it's not delivering you much value. Get a high-interest savings account or a term deposit but make sure to balance the interest you'll receive against how easy it will be to access your funds.

Planning for mortgage rates to increase

As we start upon a cycle of increasing rates, keep in mind that the more prepared you are, the softer the impact that rate rises will have.

It's time to question your spending habits and examine the effects of future rate rises on your debts. The more careful your financial planning is now, the better placed you'll be to cope with rate rises as they come. Thinking about buying a home? Visit Our Home Sweet Home for information on home buying, home loans and more.


Important information:
This information should be used as a guide only. It is neither the provision or legal or financial advice. No warranties are given as to accuracy or completeness. You should seek your own independent legal and/or financial advice.