How to cope with interest rate increases

Rates are on the rise again.
 
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01.Interest rates going up

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The Reserve Bank of Australia (RBA) has increased interest rates by 0.25% in April. Economists expect further interest rate increases.

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Variable or fixed rate?

When interest rates go up it might already be too late to beat the rate rise by switching to a fixed rate — banks often increase their rates when they’re expecting a rate rise.

However, if you need to budget and really can't afford much higher rates, a fixed rate gives you security.

But fixed rate mortgages often restrict the repayments you can make and penalise extra repayments, so if you can afford to pay more than the minimum a better option might be a split loan. Splitting your loan between fixed and variable rates can offer an element of security while still giving you flexibility.

Make extra repayments if you can

Increasing how much you pay, particularly in the early years, can have massive long-term benefits saving you thousands of dollars in interest.

Example: Georgina is less than two years into her $200,000, 30-year variable loan. At her present interest rate, adding $100 to the minimum fortnightly repayment would cut over eight years and $87,000 in interest off Georgina’s loan.

Easy ways to make extra repayments:
  • Pay fortnightly By paying half the monthly amount every two weeks you’ll make the equivalent of an extra month’s repayment each year (as each year has 26 fortnights).
  • Pretend fix Use our table to find out what your minimum repayments would be if your rate was 0.5% higher and then change your repayments to this higher amount if you can afford it.

Minimum monthly repayments over 25 years ($)



















Interest rate 









Loan amount ($) 5.00% 5.50% 6.00% 6.50% 7.00% 7.50% 8.00% 8.50% 9.00% 9.50% 10.00%

100,000

585 614 644 675 707 739 772 805 839 874 909

200,000

1,169 1,228 1,289 1,350 1,414 1,478 1,544 1,610 1,678 1,747 1,817

300,000

1,754 1,842 1,933 2,026 2,120 2,217 2,315 2,416 2,518 2,621 2,726

400,000

2,338 2,456 2,577 2,701 2,827 2,956 3,087 3,221 3,357 3,495 3,635

Features to look for

It's important not to judge a home loan solely on the interest rate and up-front fees. Some features can save you money:

  • Redraw accounts Storing your savings in your mortgage saves you interest. But watch out for redraw fees and minimum redraw amounts.
  • Lenders may waive fees and charges for other accounts you have with them, such as monthly account keeping fee for your transaction account.
  • Make sure you’re not penalised for extra repayments. Some loans, for example, fixed interest rate loans and some no-frills variable loans, may limit the amount you can pay off your loan.
 
 

 

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