Interest rates are low now, but…

The battle over interest rates has been well publicised. Banks continue to campaign hard for your new and/or existing mortgage debt with all manner of incentives to get customers on board. But what happens when interest rates start to go the other way. Are you prepared?

While the media has predominantly been focusing on the rates war and how people can make the most of it, I urge you to think ahead. And a crucial part of planning ahead is considering the impact on your finances if the rate on your loan goes up. Do you have a financial plan in place to manage this situation?
If not, then perhaps worth considering the following tips:

1. This one might sound a bit obvious, but make the most of low interest rates and pay as much of your loan as you can now. If your repayments have gone down because of interest rates, you might consider keeping them at the previous higher repayment to reduce your debt faster.
2. Consider fixing part of your loan. If you’re worried that increasing rates would make it hard to meet your repayments, you could fix some or all of your lending now while rates are at a more comfortable level.
3. Pay off your most expensive debt first. If you have a personal loan with a higher interest rate, make sure you pay it first.
4. Making small increases to your fortnightly or monthly repayments can have a significant impact on the total payments made over the term of your loan. For instance, if you had a loan for $200,000, with a 5.25% interest rate over 30 years, your fortnightly repayments would be $509.48 and at the end of your term you would have paid a total of $397,394.
5. By reducing your loan term to 25 years (instead of 30), your fortnightly repayments would go up to $552.84, but most importantly at the end of your term you would have paid a total of $359,344. Yes, your repayments go up by $43.36 a fortnight, but not only would you repay your loan 5 years earlier, you also would have saved $38,050.
6. Alternatively, if you maintained status quo and your interest rate increased by just 2% from 5.25% to 7.25%, your fortnightly repayments will have increased by $120 to $629 per fortnight and you would be paying $490,944 over a 30 year term!While the above examples may appear manageable, chances are your own mortgage debt and repayments will be a lot bigger – particularly if you live in Auckland!

With such a big financial decision, it’s important you make the most of what’s on offer and that you have a long term financial plan, which will help you get out of debt faster. With interest rates still at record lows, you could be forgiven for thinking rates are likely to increase at some point over the next 30 years, perhaps sooner rather than later!

Regardless of whether you are considering a house purchase or already have existing mortgage debt, do not be put off getting help when doing so may stand to save you tens of thousands of dollars in interest!