Although mortgage holders have welcomed interest rate cuts with open arms, it is important not to become too used to it and be prepared for possible interest rate rises in the future.
With the interest rates remained unchanged for 2014, some industry experts are predicting that the interest rate will rise sometime during 2015. But, instead of trying to keep track of the industry, borrowers should take the safe option and be prepared.
With the interest rates significantly lower, the best thing you can do is set your repayments higher than the minimum required. For each interest rate decrease, you may be thinking ‘great, now I have extra cash to spend.’ But it will be worth it if you kept your repayments the same so that you are now paying more than the minimum and you are paying your home loan down quicker. By budgeting for higher repayments now, you will be financially ready for any increase in interest rates down the track and it will not be a huge shock to your budget.
By the time you pay off your home loan, you will probably be a master at budgeting. Sticking to a budget is one of the key ways to stay on track with your finances. If you have other financial commitments such as a credit card, it is important to pay it off quickly or in full at the end of the interest free period. Always allocate a certain amount of money in your budget for emergencies. This will mean that if unexpected expenses crop up like your dog having an accident, you will not have to dip into your redraw that has built up on your home loan.
Another option for borrowers is to fix the interest rate on your home loan. Fixed rates are at an all-time low at the moment, in some cases lower than the variable interest rate, so it is very tempting: however, you need to make sure it is the right option for you. Fixed rate home loans may give some borrowers peace of mind as they know exactly what they need to pay for a fixed period of time and is really the best reason to fix your interest rate. But, after the fixed term has finished, the variable rate is usually higher, resulting in a jump in repayments. They also create a degree of inflexibility to the loan so if you need to break the fixed term because you want to change lenders or sell the property, then fixed rate break costs apply which can be very costly. It has been said that 80% of borrowers who fix actually lose out so you need to make sure that you are fixing for the right reasons. There are pros and cons for a fixed rate home loan, so it is important to take the time and think these through carefully.
Even though it is hard to predict what will happen to the interest rates throughout the year, you can take measures to prepare yourself and even see it as an opportunity to get yourself ahead on your home loan.