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How borrowers can beat the imminent rate rise

October 13, 2010

Despite the Reserve Bank of Australia's (RBA) announcement on October 5 that the official cash rate will remain at 4.50 percent, borrowers are being warned to brace themselves for a rate rise by the end of the year.

RBS governor Glenn Stevens said in a monetary policy statement that an increase in rates would be probable. "If economic conditions evolve as the board currently expects," he said, "it is likely that higher interest rates will be required, at some point, to ensure that inflation remains consistent with the medium-term target."

How to prepare for a rate rise
If you have a home loan or considering taking out one, there are steps that home owners can implement now that will not only help them take advantage of the current stable rates, but also prepare them for any rate increases before the year is out.

1. Accelerate your repayments. Borrowers should be making additional repayments to their home loan to not only prepare themselves but to get used to the higher interest rates. The process of accelerating your repayments will also reduce your loan size, save you in interest and cut months or years off the term.

For instance, just by adding as $100 per month to a $300,000 mortgage with the projected average variable rate of 7 percent, you could save more than $43,000 and cut almost three years off your 25-year term.

2. Consider refinancing your mortgage. Every 12 months or so you should do a health check on your mortgage to ensure you are getting the best rate and you aren't paying more than you need to. Now is a great time for borrowers to compare home loans online and consider refinancing.

For instance, one of the top variable rate home loans listed on RateCity is by State Custodians with a 6.46 percent comparison rate for a $300,000 loan. If you had a current mortgage of $300,000 at 7.55 percent and switched to this lower rate, you could potentially save around $209 per month or $62,700 after 25 years.

3. Compare fixed rate and variable rate home loans and consider splitting. If you are concerned rates will increase further, you may want to consider fixing your home loan now. Despite some of the major banks increasing their fixed rates there are still some good deals for fixed loans on the market. However don't expect these rates to last much longer because of the higher costs to wholesale funding.

If you don't want to put all of your eggs into the one basket, consider splitting your loan so part is fixed and some variable. Split loans can reduce the impact of rate movements whether rates rise or fall, because only a portion of your loan will be affected.

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