How to protect yourself from rising interest rates
As we head into 2018, there is already plenty of talk about interest rates rising this year.
However, chatter about rates rising has been happening for years now.
In fact, can you believe that this year marks 10 years since the start of the GFC?
In September 2008, the cash rate was 7.25 per cent but by February 2009 it had been slashed to 3.25 by the Reserve Bank.
It hovered in the three to four per cent range for a few years, but the latest round of cuts actually started in November 2011.
Today, the cash rate has been at 1.50 per cent for nearly 18 months.
Will rates return to historical averages?
Prior to the GFC, the historical average variable rate was about seven per cent.
While most people have home loan rates much lower than that today, buyers not eligible for discounts i.e. just paying the standard variable rate as well as some investors on interest-only repayments or that have a line of credit – are paying around the six per cent mark already.
A variety of commentators are forecasting rate rises in the second half of this year, which may or may not happen if recent history is our guide.
Borrowers can still access five-year fixed rates of between four and five per cent, so even if rates do start to increase, lenders are clearly not expecting them to do so rapidly.
That said, if you are concerned about higher rates, there are a number of strategies you can implement to safeguard your future cash flow and assist you with rising rates.
Pay your loan at a higher rate
One of the easiest ways to prepare for the potential of higher interest rates is to start voluntarily paying higher repayments now.
What I mean by that is if you opt to pay extra into your mortgage or line of credit, that will build a buffer for when rates do eventually increase.
A simple exercise of gearing all your repayments now to a pegged rate of 7% will build in a buffer to your loans for future need. Hopefully you never need that buffer, but in any case it will assist you to repay your loan up to 10-12 years sooner and save you hundreds of thousands of dollars in interest.
Fixing your interest rates
Another option is to consider fixed-rate loans, which can either be in part or whole.
Fixed-rate loans will lock in your repayments for a set period of time to secure your cash flow.
You need to be aware, however, that fixed rates can either work for or against you, depending on the direction of interest rates.
Complete a full review of your loans, properties and interest rates
Another strategy is to go to your lender or broker and ask for rate review.
There remains solid competition between lenders for business so you can likely achieve rate reductions if you simply ask the question.
You should also review your long-term property goals to ensure that you can keep growing your portfolio if that’s your plan – or perhaps decide to have a breather so you can build up your equity or cash position.
At the end of the day, no one wants to pay more than they have too, but sometimes borrowers focus too much on interest rates rather than the bigger picture.
As I’ve said before, holding property for the long-term is one of the keys to improving your financial future.
Rates are still well below historical averages, so rather than getting caught up with paying 50 or 100 basis points more, borrowers should remain focused on their end game.
And with increasing rates potentially on the horizon, the best time to start planning for that is right now.
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The information provided in this article is general in nature and does not constitute personal financial advice. The information has been prepared without taking into account your personal objectives, financial situation or needs. Before acting on any information you should consider the appropriateness of the information with regard to your objectives, financial situation and needs.