Laura Akhurst - 24 Apr, 2014

Borrowers Should Prepare for Potential Interest Rate Rises

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Economists are suggesting that by the end of 2014 interest rates will begin to start rising and that record low interest rates will become a memory for many home loan holders.

While the official cash rate remains on hold at 2.5 percent. There has been a great deal of speculation about where interest rates will head over the next 12-months. Most economists now agree that the only way is up. In fact, 5 out of 11 economists surveyed said a rate rise would happen in the last quarter of 2014. Many economists suggest that November could be when official cash rates rise. If it’s not in November, then it is highly likely that lenders will begin to raise interest rates ahead of the Reserve Bank of Australia (RBA).

Many home loan experts are suggesting that home owners who have a mortgage and who are planning to stay in their existing home for a number of years should review their home loan sooner, rather than later.

Why You Should Review Your Home Loan

Reviewing your home loan allows you to ascertain if you can afford home loan payments when interest rates rise. Use a mortgage calculator to estimate how much your home loan repayments will be if your interest rate rises 1 or 2 percent. Keep adjusting the rate until you can no longer afford to pay the repayment amount. This enables you to find your maximum repayment amount.

If you find your maximum home loan repayment amount is not much greater than what you’re currently paying, then it may be time for you to consider where you are spending money and how you can budget better. Having more residual income now will allow you to accommodate for interest rate rises in the future. This is called a ‘buffer’ and it protects your financial investments in the future.

Creating a Home Loan Buffer

Most financial experts suggest that you have a buffer that covers at least 2 percentage more than the current interest rate. This means that if the current variable interest rate is 5.45 percent, then your buffer should be able to cover 7.45 percent. This equates to a buffer of an extra $400 a month on a average mortgage of $300,000.

If you don’t think you’d be able to cope financially if rates rise, then now may be the right time to consider refinancing, especially if you’re not planning to move for more than 5-years. Refinancing and moving to a fixed rate home loan that has a lower interest rate than your current home loan can save you thousands in interest and also give you peace-of-mind when rates rise.

However, before you switch home loans you need to review your existing mortgage, check exit fees and other costs, and compare home loan products.

Are you looking to reduce your monthly expenses and to beat rate rises? If you said yes, then contact eChoice and find the right home loan for YOU today.

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