Monday, August 20, 2007

Fighting the Rate Rise

With another interest rate rise announced last week, some of you may be finding it difficult to keep up with your mortgage repayments. Here’s a few tips we’ve found which may help ease the strain.

Interest rate rises can throw your finances into chaos. But only if you let them. For each $100,000 you have borrowed you are looking at about an additional $16 a month. So on a $250,000 loan it is about $40 extra and on a $500,000 loan it's $80 (assuming a 25-year term).

How much pain would this cause you? Might it simply mean one less bottle of wine a week - hardly appealing, but eminently achievable? Or might it condemn you to nothing but noodles with the occasional vitamin tablet for a nutrient burst (a diet incidentally that a friend swore by at university)?

Well, what if I were to tell you that it is probably possible to actually cut your minimum monthly repayments?

Here are three strategies to implement before it's too late:

€ First, if your lender still offers a fixed rate below the rate you have been paying, you could fix your mortgage. If you hold the average mortgage of $222,000, and can get a rate 0.5percentage points lower for three years, your minimum repayments will fall by $73 a month.

€ Second, try uttering the secret password to a mortgage discount, as revealed in a recent column: the words "professional package". This will show your bank that you know it charges some customers less interest than others - up to 0.7 percentage points. If you too can get this deal, your monthly repayments will drop $101.

€ If neither of those strategies work, you could always refinance to a cheaper deal with another institution. Competition is so fierce among lenders that if you go from even an average deal to the best, you will save $110 a month. Just watch out for break fees from your existing lender.

But before you get too excited about these available savings, consider this: should you find it at all possible to keep your repayments at today's level and team this with a better deal, then you will see your loan balance reduce far and fast. And let's face it, having a fully paid off mortgage is the best possible defence against interest rate rises.

If you are able to get a three-year fixed rate 0.5 percentage points below the variable rate, you would save more than $20,000 in total mortgage interest and cut one year off the life of your loan. If the secret password secures you a 0.7 percentage point discount for the life of your loan, you would save $44,000 in total interest and nearly four years off your loan. And if you move from the average to the best variable rate, you would save $45,000 and a full four years.

Don't forget that none of these immense savings have cost you a penny extra.

Of course, if you are experiencing genuine hardship, a rate rise may threaten to tip your finances over the edge. In this case, try a strategy additional to those listed above: ask your bank if it will "re-amortise" your loan. Re-amortise is a fancy word for spreading your outstanding loan balance over a fresh 25 (or better still 30) years, effectivelwy starting the clock ticking again with lower minimum monthly repayments. It can help immensely when you are feeling the pinch and usually incurs only a small fee.
Author: Nicole Pedersen McKinnon
Sydney Morning Herald, 7th Aug 07

Karen Raffen, CEO <>

© Toop Real Estate Group

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