How to: Prepare for an interest rate increase

When interest rates are decreasing, property owners paying variable rates are among those who begin to feel a little bit more relaxed about their repayments.

However, the verdict from most economists is that the next interest rate movement will be an increase from today’s record lows. While it’s not time to panic quite yet – the general consensus is also that we will have a period of stability – it’s certainly time to put into place some measures if you haven’t thought about the impact of an interest rate increase.

In fact, ME Bank’s latest Household Financial Comfort Report, which noted that a “wait and see” approach is indeed likely from the Reserve Bank, saw 19% of people note that they had not budgeted for any rate increase.

ME Bank’s general manager for asset products Luke Easton told Property Observer that awareness of potential changes is crucial, and then those with mortgages must be allowing for changes.

So, what can you do?

Fixing your home loan

The first thing that jumps to everyone’s minds is fixing your loan while rates are low. While this may be a good solution for some, it can leave you locked in and unable to be as flexible as you may need with your loan.

Easton suggests that splitting your loan into part-fixed and part-variable might actually be a better plan. However, he notes: “Everyone is different. People should be doing what suits their own situation.”

This is good advice – not every investor and home owner will want to fix. While a fixed rate will ensure you have a low rate for a period of time, and regular repayments, it does tend to be higher than the variable rates you can currently achieve. If rates did fall further, you’d be left paying more.

Break costs, such as early repayment penalties, may come into play if you aren’t completely aware of what you’re signing up for with a fixed rate loan.

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Creating a buffer

Paying off more now, while you have the opportunity, is a great way to give yourself some breathing space for if rates do suddenly increase, said Easton.

If you put in some extra, then if you suddenly struggle to keep up you will have some space on the other end. Those who pay off the minimum are not necessarily putting themselves in the best situation.

Recently, Smartline suggested that now is the best environment in which to be aggressively making mortgage repayments as reduced interest expenses mean you can pay off your principal quickly.

Practice repaying at a higher rate

Consider what might happen to your loan if the interest rate increased. Look to be putting this amount in for each repayment and see how you manage. If you’re struggling, then you need to be looking to solutions quickly – sometimes a visit to your lender, or a financial planner, can assist.

There are also other features you can consider to help you with your home loan – such as offset accounts. There’s an interesting explanation here as to how offset accounts can be beneficial.

If you’re looking to get a home loan today, then make sure you factor these aspects in to your own personal exploration around what you can afford. At the end of the day, there’s more to your mortgage than the interest rate.

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