Interest rates at record lows ... for now
WHILE no-one is exactly sure which way interest rates will move in the next few months, the reality is that at some stage in the foreseeable future rates will be above their current record lows.
So it may be timely for anyone with a mortgage to consider the impact of interest rate rises on their household finances and what action they can take now to manage that impact.
"Interest rates are at historic lows and there is widespread speculation as to where they will go from here," Smartline Personal Mortgage Advisers executive director Joe Sirianni said.
"Recent comments by the RBA indicate that the interest rate cut door is still slightly open, but money markets seem to think that it's more likely that they won't cut again.
"That means we are moving closer to the time when rates will start to rise again, particularly if the economy improves. For those who haven't already, now is the time to perhaps look at locking into a fixed rate and considering other ways of managing higher interest rates."
Mr Sirianni said when assessing an application for a home loan, banks factored in affordability at an interest rate 1.5-2% above the current rate to ensure that people don't get into financial stress if and when rates increase.
However, for those concerned about the potential impact of rising interest rates, Smartline suggests the following:
Consider fixing part or all of your home loan
"Indications are that it's a good time to fix interest rates if you haven't already," Mr Sirianni said.
"The long-term average variable rate in Australia is about 7%, so fixed rates below 5% really are attractive for most people."
Mr Sirianni said for those keen to pay off a significant portion of their loan in the next few years - which can be more difficult with a fixed loan - it might be worth considering fixing a portion and keeping the other portion at the variable rate.
"When considering the interest rate, make sure you look beyond the 'headline' rate and understand the comparison rate - this gives you a complete understanding of all the other fees and charges associated with the loan."
Don't forget the rate lock
Many people are unaware that your home loan rate is that which is current at the time of settlement, not when you applied for the loan.
With a time lag of several months between loan application and settlement, rates can often move during this time - including upwards.
A rate lock facility, which involves a small fee, ensures that your selected rate applies to your loan at settlement.
Carefully consider your fixed rate term
If you do decide that a fixed rate loan is beneficial, think carefully about the term you choose.
"Generally speaking, it's probably safer to go with a one-, two- or three-year term," Mr Sirianni said.
"While fixed rates are available for five-, seven- and even 10-year terms, that is a very long time to be committed and the break fees can be significant, totalling thousands of dollars."
Get into the habit of making higher repayments
If you can make your home loan repayments at a much higher rate from the outset, this will allow you to get comfortable affording repayments at that level and will allow you to build up excess funds in the meantime.
Understand your spending patterns
Having a very clear understanding of your spending patterns will enable you to understand where your money is going and what is left over at the end of every month.
Going through this exercise will allow you to see where you can cut expenses if needed to afford higher home loan repayments in the future.
Similarly, consider whether there might be ways of increasing your household income if needed.
Get good advice
"Seeking guidance from an experienced and quality mortgage adviser will ensure that you are aware of all the options available to you to manage rising interest rates," Mr Sirianni said.
"Once they understand where you are in life and what you're wanting to achieve, they can advise of the best approach to ensure you can comfortably manage your home loan now and in the future."