Managing finances when interest rates rise
Refinancing?
is it the right
option for you?
In the past, rising interest rates were not a significant concern, as they had been steadily declining for over a decade. However, with the Reserve Bank now raising the official cash rate to combat inflation, it is crucial to be aware of the potential impact of fluctuating interest rates, especially when household prices are also on the rise.
1. Taking control of your finance
Increased interest rates may result in higher home loan repayments. In a high interest rate environment, taking the time to create a budget can empower you, enhance financial control, and mitigate concerns about the rising cost of living.
Simply understanding your monthly expenses can go a long way in reducing financial anxieties. Start by reviewing your bank statements and identifying the inflows and outflows. Consider examining savings accounts and term deposits for your financial situation.
2. The role of the reserve bank
The monthly consumer price index now sits at 6.8% in the 12 months to April 2023. Source: ABS Monthly Consumer Price Index Indicator
To regain control over prices, the Reserve Bank has been raising the cash rate target. This policy measure aims to discourage excessive borrowing and spending, as higher home loan repayments create a disincentive. Consequently, the economy is expected to slow down, eventually curbing inflationary pressures.
3. High interest rates
To safeguard your finances, it is never too early to assess the suitability of different home loan options. If your budget allows limited flexibility, fixing the interest rate on your home loan can protect you from future rate hikes and provide repayment certainty, facilitating better monthly budget planning. On the other hand, if you have more financial flexibility, opting for a variable interest rate might be preferable.
Exploring the differences between variable and fixed-rate home loans will help you make an informed decision. Another option worth considering is an offset account, where the money held offsets your home loan balance, reducing the interest charged each month. Utilizing this feature can result in substantial interest savings and shorten the loan term.
4. Refinancing to lower monthly repayment
Many homeowners contemplate refinancing their home loans and adjusting their repayment frequency as a potential strategy. Altering the repayment frequency can significantly influence the total interest paid throughout the loan term.
The principle behind this strategy is straightforward: when you make more frequent repayments, you effectively reduce the outstanding principal balance more frequently. This results in a decreased accumulation of interest over time. However, it is crucial to seek guidance from a financial planner or mortgage broker before making any adjustments to your home loan.
5. Speak to the experts.
Navigating the refinancing process can be complex, and seeking guidance from mortgage professionals is highly recommended. Mortgage brokers and financial advisors can provide tailored advice based on your unique circumstances. They can help you assess the feasibility of changing your repayment frequency, compare loan options, negotiate with lenders, and guide you through the refinancing process. Their expertise and knowledge of the market can assist you in making an informed decision that maximizes your interest savings.
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