Australian homeowners were hoping that the Reserve Bank of Australia (RBA) wouldn’t increase rates this week – but, in lifting rates for the fourth time in eight months, the central bank has signalled its commitment to try and force inflation back down to a manageable level.
Wizard Home Loans chairman and founder Mark Bouris says some borrowers will be understandably hurting as they contemplate their higher loan repayments – however, he cautions against taking rash action.
“No one likes a rate rise, least of all recent first home buyers and those hoping to enter the market,” Bouris says.
“But when you enter the property market, you’re using your home to build wealth, irrespective of whether it’s solely your intention to put a roof over your head. And unfortunately, rate rises are one element you need to keep in mind.”
Bouris says that savvy homeowners should consider simple wealth creation strategies to pay off their mortgage as quickly as possible, and create a buffer against future rate rises. He suggests:
- Take stock of your overall financial position: Complete a detailed budget that includes a list of all expenses, and think about where you can cut discretionary spending
- Budget in a buffer: When you develop your new household budget, try and ensure you have a sufficient buffer that you can draw upon to handle any future rate rises
- Commit to simple sacrifices: Take your lunch to work or start making a coffee at the office instead of buying one. The money saved from these two activities alone would go along way to offsetting any increase to repayments
- Make lump sum payments: Rather than spending the federal government’s impending tax cuts on a holiday or frittering away any bonuses you receive on discretionary items, put this money into your mortgage. In addition to reducing the amount of interest you pay over the life of the loan, lump sum payments can help minimise the effect of rate rises
- Make fortnightly repayments that equal half your monthly commitment: This effectively means that you make two additional payments per year, reducing the amount against which you pay interest faster, consequently lowering the repayments
- Explore direct salary crediting: This means that from the day you credit your mortgage account with your salary, you'll be saving interest and reducing the time it takes to pay off your loan, as well as reducing the repayments.
- Consider refinancing: Every homeowner who is committed to paying off their loan as quickly as possible should periodically explore the option of refinancing, to ensure that they are deriving a competitive interest rate and the maximum benefit from their existing loan
Bouris acknowledges that fixing your interest rate was one option available for nervous home owners. However, he cautioned against making a decision to fix for the wrong reasons.
“On the plus side, if the RBA continues to lift rates, borrowers will be protected from any further hits to the hip pocket and be secure in the knowledge mortgage repayments won't change over the fixed period,” he says.
“However, the biggest deterrent to fixing during an upward interest rate cycle is that it may already be too late to obtain a lower rate, and you lose the flexibility of variable home loans and may not be able to make extra repayments without incurring penalties… The old chestnut in all of this is to sit down and speak with a professional lending manager who will listen to your needs and help you devise a wealth creation strategy.