Taking advantage of low interest rates
Don't wait to get ahead
Home loan interest rates are low right now but it's likely
they won't stay low forever. Here's how to take advantage of
interest rates while they are low and tips for how to cope if and
when they rise.
How to take advantage of
low mortgage interest rates
The saying 'make hay while the sun shines' holds true for
dealing with home loan interest rates.
If you make extra repayments while rates are low you will reduce
your loan balance, save on interest and build a buffer to minimise
the impact of future rate rises.
If you are not sure by how much you might increase your
repayments, you could:
- Increase your repayments as if rates were already 2%
- Round up your repayments to the nearest hundred dollars
- Just pay what you can afford
Have another look at your budget and see if there are
any expenses you could reduce to make extra payments on your
Work out how much your repayments would be if
interest rates rose by 2%.
Make more frequent repayments
- If you are paying your mortgage monthly and you are paid
fortnightly, divide your mortgage repayment in two and make
repayments every time you get paid.
- If you are paid monthly, divide the repayment amount by four
and make repayments weekly
Not only will this strategy save you interest every
time you make a payment, by the end of the year you will have made
extra repayments, as there are more than 4 weeks or 2 fortnights in
Case study: Tim and Anna increase their mortgage
Tim and Anna bought their first home 6 months ago.
They borrowed $500,000 and their current repayments are $2,904 per
month. They are comfortable with the repayments now but worry about
how they would cope if interest rates were to rise.
Tim and Anna completed a budget and realised they were wasting a
fair bit of money on things like lunches, magazines and eating out.
They decided to direct some of this money to their mortgage to
build a buffer against future interest rate rises.
As they are both paid fortnightly, Tim and Anna changed to
fortnightly loan repayments and increased the amount they pay to
$1,600 a fortnight, which still left them some 'fun' money.
These small changes will put an extra $6,752 a year into their
mortgage, which will not only build a
buffer but will reduce their interest each month.
Coping with a home loan
interest rate rise
If interest rates rise and you're not prepared, here are
some things you can do to keep afloat.
Do or redo your budget
Looking critically at where you spend your money can often shine
a light on areas where money is wasted or being spent
on things that aren't really important. Think about what
luxuries you might be prepared to give up so you can afford your
home loan repayments.
Work out where you can save money.
Take on a second job
Finding additional ways to earn money is another way to keep
your home. This could be a part-time job or maybe something that
would fit into your lifestyle like dog walking or delivering papers
Rent a room out
If you have a spare room consider taking on a boarder or a
student to rent the room.
Sell other assets
Think about what other assets you have that you may be able to
do without. For example, if you have two cars, could you make do
with one? Selling an asset you can't really afford to maintain will
provide an instant boost to your mortgage and may even reduce your
Move in with family
As difficult as it may be to swallow your pride and admit that
you are in trouble, moving back to the family home or sharing with
friends or relatives for a year or so might be a good option.
Renting out your home might give you some breathing space and allow
you to make extra repayments, building a buffer before you return
to your home.
Switch your mortgage
If you've been with your current lender for a while, it may be
time to consider switching home loans. If
there are cheaper loans available that suit your needs, call your
current lender to see if they will match another lender's rate.
Often the only thing you have to do to get a better deal is
Go 'interest only'
Ask your lender if you could make 'interest-only' payments on
your loan for a short while. This will lower your repayments but
will also extend the time it takes you to repay your loan, so you
should only use this option as a last resort.
Work out how much your repayments will be before and after
the interest-only period.
Increasing your home loan repayments while
interest rates are low is a great way to get ahead on your
mortgage. If a rate rise does catch you out, take a step back and
see what options you have to help you get through.
Last updated: 25 Jan 2017