Rate rises are well and truly here, but it’s not too late to switch to a better rate for your home loans.
Homeowners and investors will have been paying close attention — the Reserve Bank of Australia announced on Tuesday 3 May the decade-long streak of rate cuts has come to an end.
While the rate rise was initially small, at 0.35% from 0.1%, the Reserve Bank has since raised the cash rate a whooping 50 basis points to 0.85% and experts are predicting further incremental rises throughout the year — and potentially beyond.
Rates may continue to rise, and it pays to be prepared.
“In due course, the market expectation is for interest rates to rise by as much as 2%,” Angus Moore, economist at realestate.com.au, says. “So, what that means is we’ve already seen fixed rates offered by major lenders increase.”
Fixed rate coming to an end?
If your fixed rate period is coming to an end, it could be an opportune time to consider refinancing.
“Even before the RBA announcement, most fixed rates were previously running around 2%, but now they’ve gone up further,” says Moore. “And, if rates continue to rise, the fixed rates will go up again.”
Most major lenders are currently offering borrowers two-year fixed-rate home loans that range anywhere from 2.3% to 4% – but the danger if you are already have a fixed-rate mortgage and the fixed period is coming to an end, is that you could get rolled onto an even-higher interest rate. So, it is wise to consider refinancing before your fixed term is over.
Interest rates on new mortgages are generally lower than average.
Moore advises that if you’re looking at refinancing, it pays to shop around. Don’t simply renegotiate your rate with your current lender unless they can match the low rates offered elsewhere.
“Generally, interest rates on new mortgages are below the average,” Moore shares.
“So, it’s important when you’re looking at refinancing that you explore all the available options across different lenders and different loan types.”
Beware of fees
If you’re shopping around for a better deal, one consideration mortgage holders need to be mindful of is lending fees.
Some new loans or fixed loans will include set-up fees, monthly fees, account fees and exit fees.
Extra fees and charges may soon be a thing of the past, depending who you bank with.
Not only are these fees unnecessary, but they can also add up quickly, costing thousands of dollars — in addition to interest.
Thankfully, new entrants into the lending market are ditching excessive charges. For example, some don’t charge any fees, transaction fees, application fees, usage fees, offset sub account fees or exit fees.
Offset your interest
With tough times ahead, chances are some borrowers will want to save some extra money as a buffer. It’s a good idea to have those funds offsetting the interest on a home loan and not just languishing in an account.
This is where an offset facility comes in handy. However, many banks charge additional fees to service the additional account.
One alternative is an offset sub-account. Unlike a traditional offset, it’s not a secondary account. Instead, it’s a facility within a home loan where you can deposit additional funds which are kept separate but deducted from the loan balance when interest is calculated.
An offset facility on your home loan could help you pay it down faster.