There is no doubt it is time for homeowners to consider the prospect of interest rate hikes, particularly after the Reserve Bank governor Philip Lowe failed to rule out an interest rate rise before 2024.
If you have a variable rate mortgage, the advice from Craig Betalli, Senior Broker with Our Broker, is that a “split rate loan” could be the shrewdest way to future-proof your mortgage against possible rate increases. A split rate loan lets you divide your mortgage between fixed and variable rate components. This strategy allows you to enjoy the best of both worlds – the certainty of a fixed rate and the features of a variable rate loan, such as a 100% mortgage offset, which enables you to pay down the loan faster.
However, whether you choose a split rate or a fixed-rate loan, you must decide how long you’ll lock the rate in for whether it’s 3, 4 or 5 years. As part of this decision-making, you must consider a myriad of factors such as what your borrowings are, what your cash flow looks like, whether your career or business prospects are likely to change over the next five years, and your age and family situation. Fortunately, a finance specialist such as Our Broker can help you work through these variables when deciding on the right mortgage strategy.
When selecting fixed rates, if you have the choice between a five-year rate, which is cheaper than a 3-year rate, then locking in for the half-decade is a no-brainer. However, when the 3-year rate is cheaper than the 5-year fixed-rate, you must work out the extra cost for the first 36 months and how you will make it up in the last two years of the five-year term. Obviously, to make the five-year fix a winning strategy will mean banking on the RBA increasing official rates. So, there are risks with this strategy that a mortgage broker can help you navigate.
At the same time, whether you choose a split rate or not, Craig urges homeowners to make hay while the sun continues to shine on historic low-interest rates. Every extra dollar you pay off your home loan now is a dollar less you'll need to pay when rates increase. Moreover, if you have a fixed rate and breach the extra repayments cap, consider parking any additional payments in a saving account. When you come off the fixed-rate, you can use these savings to make extra payments off the mortgage.
To find more about the best way to retire your mortgage debts, contact Our Broker today on 1800 913 677.