Last week's stock market crash. Rising Bond Yields. 10% of value eroded since January. Most economists are now saying there is a rate rise on the way.
Australian borrowers can now be sure and make a determined effort to work around it.
An increase of 0.25 will make a difference to repayments on the average property loan, though it will be only a modest climb. On a loan of $500,000 over 30 years at the average standard variable rate of 5.27 percent, a move to a 5.52 percent interest rate will mean an additional $106 per month in interest alone. (MBs please correct me if I am wrong)
A number of property investors are concerned about their rising mortgages and unsteady property prices. Borrowers should still remember property investment is a long-term strategy and interest rates are still at historically low levels.
Some general tips - advise given to me some 17-18 years ago and still is relevant - when I was a newbie in investing, for coping with rising interest rates:
1. Consider fixing part, or all, of your property loan
If you have a tight budget and want peace of mind on being able to afford repayments for a fixed period, you may consider fixing part, or all, of your loan. Weigh up costs associated with fixing your loan along with the higher interest rate you may pay at a fixed rate. Keeping part of the loan at a variable rate will allow you to make extra repayments without penalty.
2. Consolidate your debts
As interest rates rise on property loans they also rise on personal loans and credit cards. Consider rolling all debts into your mortgage, so instead of paying a higher rate you are paying around 10 percent less. This option requires disciplines around future use of credit cards, reducing limits and so on.
3. Assess your current property loan product and possibly refinance
If you currently have a loan that offers features you are not using (e.g. offset, redraw), consider changing to a basic product without - or less - 'bells and whistles' that may offer a cheaper interest rate. For example, on a loan of $500,000 over 30 years, the change from 5.27 percent (standard variable) to 4.82 percent (basic variable) is a saving of approximately $129 per month.
4. Reduce your property loan amount with a lump sum payment
If you have money in the bank or coming to you (bonuses, etc), consider investing it into your loan.
5. Refinancing extra repayments out of the property loan to reduce loan amount
If you have been making extra loan repayments and have reduced the loan amount, you can refinance the loan so repayments reflect what you owe currently, not your original loan amount. For example, assume a standard variable loan has 18 years remaining and is scheduled to be at $250,000. However, extra repayments have reduced the balance to $200,000, so refinancing the loan over the same 18-year period at $200,000 will reduce your minimum repayments by approximately $440 per month.
6. Contribute a larger deposit to your property loan
By saving over the minimum deposit, your loan amount will be less - hence your repayments will be less and it will take you less time to repay as you'll be paying less interest. If you contribute more than 20 percent of purchase price, you will also avoid paying Lender's Mortgage Insurance (LMI), which can be considerable.
7. Don't be fooled by honeymoon rates
Some borrowers are led into a false sense of security when they take out a loan with very low one-year honeymoon rates. Often these default to a higher-than-standard variable rate after the honeymoon period has expired so check comparison tables for all fees and costs associated with your loan. If you choose to take advantage of a honeymoon rate make your repayments according to the 'post one-year period rate' from the start you'll be ahead on repayments and will avoid a shock when the honeymoon rate is over.
8. Discuss one-off payment variation, permanently reduced payments or hardship variation
Each of these options you can discuss with your lender mean the property loan term will increase but you will feel more comfortable with repayments. The first two options are self-explanatory, while a hardship variation can be requested if your loan is less than a certain amount and you cannot cover repayments due to unemployment, temporary illness or another logical reason. Always ensure you ask your mortgage broker about any fees these variations will incur, if any.
9. Take out a property loan term of 30 years
If you are looking at taking out a loan, consider the maximum loan term of 30 years. Based on a $500,000 loan at the standard variable rate of 5.27%, extending your loan term five years - from a 25-year loan term to a 30-year term - will reduce your repayments by $119 per month.
10. Factor further rate rises into repayments
If you are looking at taking out a property loan or reassessing your current one it is a good idea to factor in further rises in interest rates and, if possible, start making contributions at the higher rate. It will ease the stress when repayments do increase and will also put you ahead of the scheduled loan term as will making extra contributions.