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Prepare for Rising Mortgage Interest Rates

Prepare for Rising Mortgage Interest Rates

Inflation is on the rise and this often signals an increase in interest rates. The rate of inflation for the three months ended March, 2017 was 1%, which lifted the annual rate to 2.2% – the highest it has been for about six years. However, much of this increase was due to food and energy prices which are notoriously volatile. These are usually excluded in measuring what is termed core inflation, which is the long term trend in prices. So while prices are rising, it is still likely that the Official Cash Rate (OCR) will not change until next year.

That said, the trend for mortgage interest rates is up. The OCR is just one factor which impacts on mortgage interest rates. Mortgage lenders borrow money offshore and rising interest rates overseas will have an impact, as well as ongoing high demand for mortgage lending. While many people fix their mortgages, those who fixed when interest rates were at their lowest point will be facing an interest rate reset soon. It is time to prepare for increases in mortgage repayments. Work out what new repayments will be by using mortgage calculators that are available on most bank websites. One way to prepare is to voluntarily increase your mortgage repayments now to close to what they will be at the higher interest rate,  if can do this without penalty. This will allow you to get used to higher payments while also reducing the size of your mortgage. If you can’t see a way of making increased payments, you may need to talk to your lender about extending the term of your mortgage or converting your mortgage to interest-only for  a period of time. These are last resort options, as it is best to pay off your mortgage as soon as possible.

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Record Lows for Mortgage Interest Rates

PercentagefallRecord Lows for Mortgage Interest Rates

It has been many years since we’ve seen mortgage interest rates so low. That’s great news for first home buyers and investors in particular. Banks appear to be in a bidding war to attract borrowers. Meanwhile the Reserve Bank is in the process of implementing measures to restrain mortgage lending so as to reduce the risk of house price inflation.

Borrowing money at a low interest rate is both an opportunity and a threat. Interest rates move in cycles. Borrow at the low point of a cycle and it goes without saying that over time, interest rates will increase, thus increasing your mortgage payments.

There are steps you can take to protect yourself when borrowing at low interest rates.

While it is tempting to take advantage of lower rates to borrow as much as possible, your repayments may become unaffordable when interest rates increase. It is sensible to leave yourself some wriggle room by borrowing an amount that you know will be affordable when interest rates rise by a couple of percent.

Fixing the interest rate for the whole of your mortgage for a period of time can create uncertainty about what the interest rate will be at the end of the period. To reduce this uncertainty, consider chunking your mortgage up into two three amounts which are fixed for different periods of time. That way, if rates go up, only part of your mortgage will be affected at any one time, thus spreading the impact of higher mortgage repayments.

While it may seem a good idea to lock in a low interest rate for long period of time, be aware that if your circumstances change and you need to sell your property or repay your mortgage for some other reason, you may be charged a penalty for early repayment.

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