Financial commentators are now starting to talk about inflation and as a consequence, interest rate increases, which in turn will mean higher mortgage repayments each week/fortnight/month.
We have already seen the long-term rate begin to move upwards. A month ago, you could fix for 5 years @ 2.99%, but now the 5-year rate is heading towards 3.5%, provided your mortgage is under 80% of the loan to valuation ratio (LVR). If your loan is over 80% of the LVR then it’s closer to 4%.
An important part of my role as a Mortgage Adviser/Broker is to ensure that you have a mortgage repayment strategy that works for you. This includes making a recommendation regarding how to structure your loan repayments for your situation.
I have found that many people just look for the lowest interest rate and fix their mortgage for whatever term comes with that rate. Until recently that has been an ok strategy as for so long, rates have been steadily decreasing. Now with the upwards pressure coming on, it is very important for you to consider your longer-term financial situation and future goals. What will happen when your loan comes off the fixed-rate and that you have considered how to reduce your mortgage more quickly?
Many first home buyers will fix their entire loan for an initial one/two-year period as paying the minimum for the first year or so of their new mortgage allows them to adjust to additional costs they will face as a homeowner, such as rates, house insurance, and risk insurance. And this is ok, provided you know why you have adopted the structure you have and know that when the initial fixed-rate period ends that you again, carefully consider your options and do what you can do minimise the interest you will pay over the term of your loan.
A mortgage strategy should be a well-thought-out plan that suits your situation, protects against the future higher home loan rates, allows you to pay the home loans off faster, and is flexible enough to let you adapt the repayments for future events.
As part of my service to you, I will ensure that you understand how important this part of the process is and that you understand how to reduce your interest costs over time.
The key is to be aware so that you make good decisions now to benefit you in the longer term.
We generally suggest that you do your calculations on affordability at higher home loan rates to ensure that you can afford those, and then it’s always a good idea to adopt those repayments to pay the mortgage off faster while rates are low.
Most lenders just suggest you put the loan on the best-fixed term rate and over the longest term which of course benefits the lender as the longer the term of the mortgage the more interest you pay. As I mentioned earlier, it is ok if you do this for the first year or so if you are a first home buyer, BUT, it should only be for a defined time and be part of your overall strategy.
Example: you get a mortgage for $450,000 and the average home loan rates are about 2.85% If you fixed the entire loan for 30-years at this rate then your repayments would be about $429 per week. This will seem ok at the time however, what happens if rates increase to 4%. This means your repayments will increase to $495 per week – an extra $66 per week!
If these rates are due to inflation, it will mean that you may have overall higher living costs while your incomes may not have increased. So it’s important to factor some leeway into your mortgage payments while rates are low.
If you can, it’s a great idea to pay more than you need to now while you can. This will build in a buffer against the day when higher home rates become a reality. In the meantime, it helps pay off your mortgage faster and it reduces the term of the loan plus it saves you a lot of money in interest costs!
Seeing the reality
Seeing what you can actually achieve by being proactive with your loan strategy is usually a big incentive for most homeowners who have a mortgage. With this simple strategy, you are paying the home loan as though the interest rates were already at 4.00% but while at the lower interest rate (average 2.85%) you are able to make extra payments that go straight off the loan balance and if this was sustained would cut nearly 6 years-years off your mortgage term and save you almost $46,654.
The Right Loan Structure
In most cases, I would definitely not recommend you just lump all of your mortgage into one loan. To give you the best advice for your situation, I would really want to understand your goals and expectations for the short, medium, and long term. The example above was to show you an example of how you should factor in the possibility of higher interest rates and the impact of adjusting to the higher repayments now.
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