Dealing With Interest Rate Rises

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Interest rates have increased 0.25% and now there’s talk of possibly another rate rise before the end of this year or early next year. Today, the Reserve Bank of Australia (RBA) issued their Statement on Monetary Policy which suggests that the RBA has a “strong tightening bias”. They have estimated inflation to be around 3% by the end of 2007 and to stay at that level until mid 2008, which means there may be even further increases throughout 2008.

Managing mortgage repayments during time of increasing interest can be very difficult, especially considering your salary doesn’t increase at the same level as the repayments do. Here’s a couple of suggestions that may help you better manage the situation:

Negotiate a better rate

The published variable interest rate is not necessarily the best interest rate available. When I was shopping around for a loan for an investment property early in the year, Commonwealth Bank, Westpac and National Australia Bank all started by offering their standard published variable rate. Once we discussed the options further and I advised that we were talking to a number of banks, they all started offering their discounts. It started off at 0.5% off the standard variable rate and eventually got to 0.7% off the standard variable rate.

The point is, if you don’t ask, you won’t get. Check your rate and see what discount you’re getting, if any. If your not happy, it doesn’t hurt to see your bank manager and see what can be done.

Fixed Interest Rate

Have a chat with your bank manager and review the fixed interest rate options available. Usually, the fixed interest rate is less than the standard variable rates available and will result in reduced monthly repayments, depending on the fixed term.

Keep in mind, fixed interest rate loans are less flexible and usually don’t have redraw or offset facilities available. Nevertheless, if you think rates are going to continue to increase and you lock in now for 3 – 5 years, you could save a considerable amount over that period. There are break fees if you decide the refinance the loan before the term is complete.

Most lenders will offer the option to split your loan fixed and variable. For instance, if you have a loan of $400,000, you can have $200,000 at the fixed rate and $200,000 at the variable rate. This means you lock in half to cover exposure against a rate rise and keep half open to market movement in case the interest rates fall.

Refinance with another bank

The lending market is a very competitive space. If you don’t get any joy negotiating a discount with your current lender, why not shop around and see what other institutions have to offer. It doesn’t have to be one of the mainstream banks….some of the lesser known lending institutions are bound to offer competitive rates and lower fees to acquire a new customer.

I bank with a Credit Union and they offer very competitive rates, no set-up fees and no transaction fees for any of my accounts. They also provide a personal service better than the service any of the larger banks offered me in the past.

Most of the major banks, Commonwealth Bank, Westpac and National Australia Bank have dedicated loan consultants who will actually come to your home after hours and spend time to discuss all the options available.

Remember, you’re in the box seat and they want your business, so do your homework, research the product you want, get knowledgeable about rates and discounts and ask as many questions as you need to be 100% comfortable with your decision. We’re talking about a lot of money here and you don’t want to sign up to terms and conditions you don’t fully understand only to regret it later.

Couple of things to consider before going down the road of refinancing your mortgage:

1. there will most probably be break fees attached to your existing mortgage;

2. when you refinance you want to make sure you’re getting a better deal, so make sure you do the sums or get some independent to help you – don’t rely on the word of the lender;

3. understand the impact of choosing the term of the loan – if you refinance your mortgage (which is already one quarter paid off) over 25 or 30 years, the repayments bound to be less than the current repayments, even if the interest rate is the same…..but remember you’ll be paying more interest the longer the term;

4. it can be a tedious process which will require paperwork etc – it doesn’t happen overnight.

There’s a few options to consider with regarding to trying to better manage your mortgage repayments.

Interest rate rise or no interest rate rise, you should review your mortgage to ensure you’re getting the best deal possible. Banks and other lending institutions make very big profits don’t be afraid to ask for your share.

Good luck.

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