After 11 years of interest rate cuts down to record low levels, interest rate rises are about to start, which could hurt many borrowers.
But there are four things you can do to lessen the pain of interest rate rises. It’s worth exploring these so you don’t end up paying more in interest than you need to.
1. Consolidate your loans
Look for a bank that will offer you a low rate if you transfer a number of debts into the one loan. But take care to read the fine print. Some banks charge an attractive interest rate in the first year if you consolidate your loans with them. But you can end up paying above-market rates in subsequent years to make up for the low rate they offered to get your business initially.
Once you’ve consolidated, focus on paying the new loan off as quickly as possible because interest will keep mounting.
2. Think about fixing a portion of your home loan
You’ll have to crunch some numbers to work out whether this is a good option for you. If you decide to fix all or part of your loan now you could end up paying less in interest in the future as rates are expected to keep rising for some time.
Take care to ensure the fixed rate the bank will offer you isn’t too high. Some banks’ fixed rates are already well over long-term interest rate trends, which could mean you end up paying more than you need to when rates eventually plateau.
3. Think about changing lenders for your mortgage
You have to be careful taking this approach because many lenders charge a penalty fee if you switch lenders. But do your sums. If it works out that you’ll save more in interest over time by switching lenders than you’ll pay in penalty fees, then it could be worth taking your business to another bank.
Even just letting your bank know you’re talking to other lenders might prompt them to give you a rate reduction to keep your business. If you have things like insurance and investments with the same bank, ask for a home loan rate discount.
4. Pay more than the minimum amount on your loans
The faster you pay off your loans, the less you’ll pay in interest. If you can try to pay off more than the minimum amount each month, you’ll pay off your loans sooner. You’ll also save money on interest on the way through.
It’s worth remembering that even though rates will start to rise in the next few months, we can expect further rate rises into the future. To be prepared, do a comprehensive budget and work out where cuts to expenses can be made so you have extra cash to put toward loan repayments. That way you won’t be so stretched in the months ahead.