How to safeguard your lifestyle against rising home loan costs.
Some of you may remember when interest rates were much higher, at about 10 percent, which we thought was cheap considering our parents’ generation paid 17 percent. When it comes to the property market, especially lending, interest rates generate plenty of discussion.
Considering how high interest rates have been in the past, now would seem a good time to take out a home loan.
But what happens when interest rates rise? A recent RACQ survey* revealed one in 10 Queenslanders had experienced difficulties in meeting their loan repayments in the past 12 months, even in this low-rate environment.
Surprisingly, the main method of saving money was opting to change home loan providers.
There are a few things you can do to save money before switching home loan providers. Ask your current lender if you’re on the best rate available and consider splitting your loan to lock in a portion at a cheaper fixed rate. The danger with continuously chasing the lowest rate by switching providers is that the cost of establishing a new loan, including Lenders Mortgage Insurance and establishment and exit fees, can sometimes outweigh the benefits. More importantly, once interest rates rise, they will rise across the market so it will be difficult to continue to save money by switching loan providers.
In preparation for the inevitable rate rise, the Australian Prudential Regulation Authority (APRA) increased the minimum interest rate buffer it expects banks to use when assessing the serviceability of home loan applications. This means prospective home buyers will now need to show banks that they can afford loan repayments at an interest rate that is at least three percentage points above the loan product rate.
APRA’s actions should help to ensure new borrowers, or those who switch home loan providers, are able to afford the debt they are taking on, both now and into the future. What can you do now to safeguard against the unavoidable home loan rate rise?
It is important to remember that planning for the unexpected and paying down a loan will provide you not only more peace of mind should your circumstances change, but will also work towards your overall financial wellbeing.
*Source: RACQ Quarterly Omnibus
The information in this article has been prepared for general information purposes only and is not intended as legal advice or specific advice to any particular person. Any advice contained in the document is general advice, not intended as legal advice or professional advice and does not take into account any person’s particular circumstances. Before acting on anything based on this advice you should consider its appropriateness to you, having regard to your objectives and needs.