There's a lot of talk about the rising interest rates, but what does that mean for you?
Will it affect your mortgage payments? Will you be able to afford them?
The good news is that significant rate rises likely won't increase your monthly payments much in the short term. But over the long haul, higher interest rates can result in you paying significantly more interest over the life of your mortgage.
Here are some tips on managing your mortgage when interest rates are rising.
1. Calculate the Effect of Rising Rates on Your Repayments
To understand how rising interest rates affect your mortgage, you must know your current rate and how much you expect it to rise.
Estimate the number of annual percentage points that your loan provider will add to your mortgage rate. If you can't find any information on the internet, consider calling your lender.
When you know the potential increase, you can calculate what your future repayments will be and how they'll affect your loan. Ensure you consider worst-case scenarios and your ability to afford your mortgage. Once you understand the potential repayment scenarios, you can create a plan to manage them.
Note: If any changes might affect your monthly payments or your ability to afford them, talk with your lender as soon as possible!
2. Shop Around For Better Mortgage Deals
As interest rates rise, there are fewer new home buyers, meaning financial institutions have less business. Therefore, you can likely find a better deal with a competitive interest rate.
Even a slight difference in interest rates can make a big difference. Let’s consider two scenarios for an $800,000 home ($720,000 loan):
- At the average rate of 5.19%, you'll pay roughly $700,000 in interest on a 30-year mortgage.
- At the lower rate of 4.59%, you'll pay roughly $610,000 in interest over a 30-year mortgage.
As you can see, lowering your interest rate by as little as 0.5% can result in considerable savings over the life of your mortgage.
3. Consider Paying Off Your Mortgage Early
Paying off your home loan early can be a great way to save money, especially if interest rates are rising.
But even in a scenario where rates don't increase, you can still save thousands of dollars.
Let's say you recently bought a $400,000 home with a mortgage of $320,000 at 5% interest. If you pay this loan over 30 years, you'll pay about $300,000 in interest. However, if you shorten your deadline to 20 years, you'll only pay $190,000, meaning you save $110,000 over the life of the loan.
While this is a simple example, other factors affect your actual savings rate. For instance, you could use extra repayments to invest in the stock market or start a business.
Rising Interest Rates Are Part of Being a Home Owner
Australian interest rates have been dropping for over a decade, so it's easy to forget that rates do rise.
We encourage you to prepare for rising interest rates by taking a proactive approach. Planning and making wise decisions now can help you avoid paying more than necessary on your mortgage when rates go up.