Could you afford an interest rate rise?
Author: By Catherine Wolthuizen
Date: September 5 2004
Publication: The Sun-Herald (subscribe)It’s time to stress-proof your budget while you still have the chance.
Reserve Bank announcements that interest rates will remain on hold are met with sighs of relief from mortgagees around the country. We gain another month’s reprieve from potentially costly rate rises and can settle back into financial complacency. However, all good things come to an end, and the latest reprieve was accompanied by the ominous statement: “It would be surprising if interest rates did not have to increase further at some stage.”So it’s pretty clear that a rate rise is a matter not of “if” but “when”.
The issue for you is how you treat this breathing space.
The temptation would be to carry on as before, to enjoy those last few months of low rates and deal with the rises when they happen. After all, borrowers seemed to absorb the pre-Christmas 2003 rises without too much difficulty, going on to spend up big on presents and at the January sales. The other alternative is to use this time to take a good, hard look at your finances to see how well they’d withstand a rate rise, and to take the necessary steps to “stress-proof” your budget.
Step 1: Reality check
What will interest rate rises mean for you?Step 2: Finances check
Can you afford the rises?A good way to check is to bump yourself up in advance and see how the household finances cope.
If you find making the extra repayments a real stretch, now is a good time to re-examine your budget and make necessary changes while you’ve got a bit of tinkering capacity.
Step 3: Should you refinance?
Now that the property market’s cooled down, expect mortgage brokers and lenders to besiege borrowers with offers to refinance.While it may make sense to take up an offer to refinance, in many cases the break fees and other costs can eat up any promised savings.
Work out what’s best for you by first listing all the features you want in a home loan and assigning a score of three points to essential features, two points to important features and one point to not-so-important features.
Add the scores up and see how your loan compares with others on the market. You can check out the alternatives at http://www.choice.com.au.
If your home loan doesn’t measure up so well, approach your lender and see if they’ll do you a better deal. We’ve found banks prepared to shave the interest to keep business, saving borrowers thousands of dollars. Or they may be prepared to waive the costs of switching to another product they offer if it means keeping you as a customer.
Should you still believe you’d be better off switching to another lender, factor in the termination or discharge fees, other break costs, government charges, legal expenses, valuations and any other expenses.
If you would come out in front even now, make the move.
Richmond,
From the media, economists peg that an IR rise might now occur in December @ .25% (despite who wins the election). Certainly, new building and loans are still in the “boom” domain, I reckon. Lower prices for properties, as is now occurring, will mean that first home buyers can now approach the market.
Stuart Wemyss wrote a great article in this last edition of API mag about how people can manage their mortgage debt. I reckon the 105% borrowers are now going to have to get out their calculators and wonder if they can buy some bread. OPM is fine if you also have some of your own, but I reckon, for yo7ur average mortgage holder, it’s time to get the LVR lifted as a safety net.
kay henry
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