Interest rates go up and down at the whim of the market. Australia has experienced low-interest rates for quite some time, and low-interest rates could be the norm now for some homeowners. While this may be so, it will not last forever. Interest rates will eventually rise. If you are locked into a fixed rate loan, it can be frustrating watching as interest rates drop below your fixed rate. Alternatively, it can be a good time to lock in great rates for a fixed period.
But, the decision between variable and fixed interest rates is a long held debate among many Australian home owners. If you lock in rates, what if they go down? If I continue with variable rates, how long before they start rising again? These are some common questions, people ask.
There is a lot you can do to take advantage of low-interest rates.
Fix Part of the Mortgage
A fixed rate loan on part of your mortgage can be a great option when interest rates are low. You will continue to receive the same low-interest rates for the period you lock them. By fixing only a part of your mortgage, you spread the risk of changing interest rates across your entire mortgage. It gives you the best of both worlds. You can pay down the variable part of the loan as quickly as possible and still enjoy the advantages of fixed interest rates on the rest.
It is always tempting to just pay the new repayment amount whenever interest rates fall. You can always use that extra cash in the family budget. While that is great, you are better off maintaining your monthly mortgage repayments at the higher interest rate. This makes your hard earned cash work even harder for you.
There is little point saving large sums of money in times of low-interest rates when you compare how much interest you accrue on your home loan. Any money you save earns little interest so it is really a waste sitting in a savings account. Maintaining your repayments at the higher interest rate pays your mortgage off a lot quicker.
Most people make the home loan repayments on a monthly basis, they do this to line up their salary or other monthly income with the mortgage repayments. Consider switching to weekly mortgage repayments. This would considerably reduce the monthly interest component of the repayment and also reduce the time it would take to pay off the loan. This is because lenders calculate the interest on a daily basis but post it to your home loan account on a monthly basis. Make sure to equally divide the monthly repayment amount by four and then start paying that amount on a weekly basis. This will ensure that you would be repaying a little bit extra than what is actually required to pay.
Make Additional Repayments
Any additional repayments you make reduces the amount you owe. It also reduces the amount of interest you pay on the outstanding balance each month. Even if it is just a small amount, try to pay a little extra each week or month.
Set Up an Offset Account
If you haven’t already, set up an offset account with your home loan facility. Ensure to deposit the family income into this account on a periodic basis, such as yours and your partner’s salaries. Any savings in this account would offset against the balance in your home loan account and you will pay less interest.
To maximise the effectiveness of the offset account where you would want to keep as much cash as possible, consider getting a credit card. You would use this card to pay household expenses, such as groceries, utility bills and rates. You would pay off the credit card within the credit free period to avoid paying any credit charges.
Many lenders do not pass on interest rate cuts every time the Reserve Bank cuts official interest rates. This may be frustrating, so talk to your mortgage broker to get a better deal. Refinancing at a lower interest rate can help you pay off your mortgage sooner.
Talk to your mortgage broker at DotCapital for more advice on how to take advantage of low-interest rates.