Fight the rate rise(s)

The RBA has just increased the cash rate by 0.25% to 3.25%.

This is the first increase since March 2008, and is likely to be the start of an upward trend in the coming months.

With the improved economic outlook and the threat of a major recession now seemingly behind us, the RBA has started a cycle of increasing rates. Economists are forecasting that the official cash rate could rise to as high as 4% to 5% over the next 12-18 months.

With the current rise, the average standard variable rate of the big banks is sitting around 6% - although many borrowers can access rates in the “low to middle fives” through discounts, professional packages, no frill loans or non-bank lenders.

Right time to fix?

Whenever variable interest rates increase, however, borrowers understandably review their options. Therefore there is a trend towards fixed rate home loans.

According to the Fairfax publication Money, currently only about 8% of home loan borrowers are taking out fixed rates.

This is due to the sizeable gap between variable and fixed rates. For example the average three year fixed rate is about 2% higher than the variable rate, although the shorter fixed term rates are not so high.

This means that variable interest rates would need to rise steeply in order for a borrower to be better off fixing.

Of course, the main benefit of a fixed rate home loan is the peace of mind that the certainty brings – the amount of the regular repayment will not vary for the period that the loan is fixed.

This can be important for first home buyers; couples starting a family; people concerned about potential changes to their job or income level; and property investors may also be seeking certainty on the costs of their investment.

So, whilst the current sizeable gap between variable and fixed rates may discourage people from fixing today, this gap is worth watching as it can reduce in a matter of a few weeks.

Here are some other ways to fight the rate increases:

1. Talk or walk

It is worth remembering that the lenders are keen for your business if you’re a good bet. Although the financial crisis saw lenders being more careful, they are in business to lend money and will put up a good fight to gain or retain good customers.

For example, some lenders offer professional packages with up to 0.7% off their standard rate – but don’t always advertise the fact. Good knowledge of the market can help here, as can simply asking your current lender.

But some lenders won’t respond in which case, it’s time to shop around. The easiest way to negotiate is through a mortgage broker. We can sometimes be privy to special deals they don’t even know about in the branches, or aren’t allowed to offer you.

2. Consolidate – or not?

Lenders are keen for you to consolidate your debts with them and, in many circumstances; this can pay off by reducing the interest rates on certain borrowings (e.g. personal loans) by transferring the debt into a lower interest product such as your home loan.

3. Pay more often

Many loans will let you pay fortnightly or even weekly. Putting money in a bit earlier than a straight monthly payment will help reduce interest owed, which is normally calculated on a daily basis. However, the main gain comes if you do some "fuzzy maths”.

For example, if you divide your monthly payment by two and pay fortnightly then over a year you’ll end up paying 26 fortnights, or the equivalent of 13 months of repayments. Repaying this extra month each year will cut years off your loan.

4. Redraw and offset

There’s a lot to be said for a redraw facility and its close relation, an offset account.

They do help to cut the cost of your mortgage of course, especially if you have your salary paid directly into them and then withdraw gradually over the following days and weeks as you need to. But despite the fact that you’re making an extra repayment for a short period, the savings only run into the hundreds – not thousands.

Another benefit, however, is the tax break. By saving your money in your home loan or an offset account, then you are avoiding paying tax on the interest. This is a nice bonus from the Tax Office, so take advantage of it for any savings you’re making – holidays, car purchase, education, renovation, etc.

Conclusion

Now could be a good time to consider your options for financing or refinancing your home loan. If you’d like to discuss these options, please get in touch.