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Top 5 effective ways to combat rising interest rates
With interest rate rises just around the corner, this may be the best time to implement practical ways to combat the anticipated increase in mortgage repayments. That is, if you have not even thought about it despite warnings and signs of the impending rate rises a few months back.
While an increase in interest rate may seem an issue, particularly to those who have borrowed so much against their residential properties, historical data shows that Australia had seen interest rates in mid to high teens during the 1980s.
This means that we have had high interest rates before and property owners and investors were able to adjust and indeed survived those periods.
Another thing to bear in mind is that there is always another side to rising interest rates. This means that some investments will deliver higher yields that will offset any rate increases.
In this article, we will look at some practical and effective ways to combat rising interest rates. Some of the major banks and financial institutions have released data that shows many Australians have saved up a substantial amount of buffer during the pandemic period.
Statistics showed that many Australians have enough cash saved up and are actually ahead in their mortgage repayments. While this may not apply to every home owner or property investor, there are many practical and effective ways to deal with rising interest rates.
Let’s consider some of them here:
1. Pick the lender that suits your needs – from the big four banks, regional banks and other financial institutions vying for the mortgage market in Australia, you have a wide range of lenders to choose from. The thing to keep in mind is that a thorough research – with the help of a mortgage broker or other mortgage experts – can make a big difference in getting the best mortgage deal that suits your needs. Remember, getting the best mortgage is not necessarily just about the interest rate you have to pay. You also have to consider other details like repayment options, penalties when you break a mortgage and other considerations that may not be laid out upfront.
2. Choose the best mortgage (variable or fixed?) – depending on your financial situation and incoming income or source of funds, you may opt for a variable or fixed mortgage repayment. Most lenders offer variable or fixed rates depending on the interest rate expectations for the short to medium or long-term.
The beauty of this is most lenders will allow you to do a combination of fixed and variable rates. This means you can have a portion of the mortgage with a variable rate and the other portion with a fixed rate. This will give you the flexibility to do extra payments or repay early when your funds will allow.
“Make your savings work harder for you!” - Carla Nesci, Lending specialist at Wealthi
3. Interest-only or interest plus principal – another option to consider and maybe worth exploring with your lender is if you want to pay interest only or interest plus principal on your mortgage. Both have advantages and disadvantages but you need to consider what will suit you best.
4. Pick the best repayment options – ask your lender about the different options that can go with your repayment. For example, some lenders offer offset accounts that can be linked to your mortgage account.
According to Carla Nesci, lending specialist at Wealthi, one way to combat rising interest rates is by reducing the amount your loan costs by using an offset account.
An offset account is a transaction or everyday banking account that is linked to your loan. Every dollar that you put into that 'offsets' the balance of your loan - reducing the amount of interest you pay each month.
5. Boost your savings – the surge in people’s savings during the pandemic may not be equalled now that restrictions have been limited and everyone is keen to go out to restaurants, malls and other leisure activities. But this doesn’t mean that all the money saved during the past two years should be spent on splurges or binge shopping.
While everyone has their tactic for boosting savings, many people may not have the most basic budgeting plan.
Having a budget and allocating a percentage of your regular income or source of funds is an effective way to boost your savings and ultimately help your mortgage repayment progress.
Tiffy Rubinat, general manager at Wealthi, had developed a practical budget plan that’s been used by some clients. Even some who didn’t have much savings when they started their property investment journey have been successful in using this budget strategy.
If you would like to discuss the Australian property market in more detail, please reach out to the team to organise a time to have a conversation about how Wealthi can help you build a successful property portfolio.
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