The Home Loan Cushion

The lifting of official interest rates by the Reserve Bank last week to the highest level in 11 years should serve as a reminder for borrowers to always adopt strategies to lessen the impact of future rate rises. 

 

A straightforward approach is to make, wherever possible, higher repayments than the monthly amount required under your mortgage agreement. 

 

Apart from the benefits of saving interest and possibly owning your home sooner, extra monthly repayments should improve your ability to cope with higher interest rates whenever necessary. In fact, you will have built up a store of "credit" with your lender. 

 

Extra repayments also provide a cushion against financial setbacks that may occur from time to time. 

 

Another tip to prepare for possible rate rises is to initially choose a loan with a highly competitive rate. For instance, do not select a home loan that is loaded with features that you are unlikely to use. 

 

Extra features come at a cost. Most basic products, however, have facilities for borrowers to redraw extra repayments if the money is unexpectedly needed - that's the main feature many borrowers probably need. 

 

The interest-rate researcher Cannex lists the "real" interest rates of bank and non-bank home loans on its website in addition to the features of different products. There is no charge to consumers for this service. The "real" rate includes any upfront, ongoing, and discharge fees. And Cannex names its current best-buys. (See: http://www.cannex.com.au/default.asp?PageID=9) 

 

And the Australian Securities & Investments Commission (ASIC) has some great tips for managing your home loan to your best advantage. (See: http://www.fido.gov.au/fido/fido.nsf/byheadline/Own+your+home+sooner?openDocument#lowinterest)