In simple terms, interest rates are essentially market prices, which means they are a function of what can be broadly dubbed a case of supply and demand. While the average consumer almost always welcomes a drop in interest rates if they have a loan or two that they’re responsible for, interest rate hikes tend to have the opposite effect.
For potential home buyers and existing property owners alike, the timing and magnitude of any form of interest rate rise will often be closely watched. Even the smallest increase could mean hundreds of dollars more in mortgage repayments per month, so it’s important to have a plan of attack formulated well in advance as a means to protect yourself from financial stress.
How To Get Ready For An Interest Rate Rise
Although an interest rate rise of 1% looks relatively small on paper, it’s important to do the maths and have a full understanding of how these changes have the potential to impact your day to day life. As an example, for a homeowner with a home loan principal of $500, 000 can expect to pay an extra $269 per month if the interest rates increase by as little as 1%.
While some households can easily absorb the hypothetical $67.25 per week as just another expense, for others, it can take a big chunk out of the budget that would normally go towards petrol, groceries or the entertainment fund. Although nobody can predict the future, the good news is that getting prepared for a potential interest rate rise is actually easier than you might think.
Make A Budget – Are you one of those people that comes home from a Saturday night out on the town, only to find that you’ve spent $300 on dinner and drinks? Frivolous spending is public enemy number one when it comes to budgeting and having a buffer fund, so start getting a good grasp on where your money actually goes.
Consider Fixed Rates – It’s not uncommon for lenders to offer lower rates to entice new customers, but fail to look after their existing customers with the same benefits. Banks are not known for their loyalty, so ensure you know what’s on offer and don’t be afraid to ask for the best possible interest rate structure, even if that means opting for fixed over variable.
Review Your Structure – Regardless of what interest rates are doing, it’s always a good idea to conduct a home loan health check with your mortgage broker or lending provider. You may be signed up to a mortgage structure that has features you don’t actually use or need, so making some tweaks may leave you better protected in the event of an interest rate rise.
Make Extra Repayments – Making extra repayments to your mortgage or syphoning off extra money into a separate account or your offset facility could pay dividends in the long run, especially if your current interest rate is sitting lower than what it traditionally would be. In simple terms, getting ahead with your mortgage is one key way to avoid future stress.
Hardship Provisions – Every lending provider has a special policy for hardship provisions, and it’s worth getting familiar with this just in case you ever need to use it, particularly for short term mortgage stress. For more significant or long-term financial difficulties, free financial services such as the National Debt Helpline (1800 007 007) are also available.
If you’re concerned about interest rates in both the immediate and distant future, it’s worth consulting with the professionals instead of nervously speculating. In addition, doing your best to curb your living expenses and put those extra funds away for a rainy day is always a good idea – but where do you start?
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