Rates go up: what you should do

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Rates go up: what you should do

August 2007
By Gillian Bullock

The Reserve Bank has hiked the cash rate another 0.25 per cent to 6.5 per cent today, a move that was largely expected by the market on the back of higher than expected inflation figures in the June quarter.

It means that for an average home loan of $250,000, you will be paying an extra $50 a month.

Calculate the effect the rise in rates on your repayments

And it won't be long before the banks and other lenders pass on this increase in rates to their customers. This will bring the standard variable rate to 8.35 per cent.

So how can you get round this additional slug? What tactics can you employ to counter the ninth consecutive rise in interest rates since December 2001.

Lisa Montgomery, head of consumer advocacy at Resi says the first thing you should do is check that you have the right loan in the first place.

"If you were paying more than 8 per cent before today's interest rate hike, then you are probably not in the right loan as there are much better deals out there," says Montgomery.

Rather than have a standard variable loan, perhaps you can look at switching to a basic loan which is a similar offering but minus the bells and whistles. For instance you may not be able to utilise a redraw facility or make extra payments without penalty.

According to financial services research group Cannex a mortgage offering features such as redraw or offset can cost you up to 0.67 per cent more than one without.

"That's equivalent to over $34,000 extra on a $250,000 loan over 25 years," says Mamta Grewal of Cannex.

Kath Bowler, financial planning policy adviser with CPA Australia says you should be wary of the extra features.

"Redraws aren't always a fast track to financial freedom," she says. "There's a risk that these facilities can turn into a residential ATM with mortgagees constantly withdrawing the excess money to fund personal expenses rather than pay off their loan faster."

While borrowers tend to be more savvy these days a recent study by CPA found that almost one in four Australians did not know the interest rate they would pay at the time of taking out their loans.

Not knowing a couple of years down the track might be almost forgivable but to not be aware when you are actually finalising the loan is a worry.

"Considering that the increasing cost of housing is making the Aussie dream of owning your own home harder to turn into reality for many people, it is almost as if people are turning a blind eye to the cost when choosing a home loan," says Bowler.

The study found that while 24 per cent did not know the interest rate on their mortgage at the time of purchase, 44 per cent did not know exactly what their rates were down the track.

But despite not knowing the actual percentage they were paying, Bowler says many people are already making higher than minimum repayments on their loan so should be able to ride the storm. Indeed the survey showed that 69 per cent of the 300+ interviewed were making additional payments so this could present some leeway.

Resi’s Montgomery says the tax cuts that were introduced on July 1 this year should go some way to offsetting the rise but those who are highly geared "will need some additional belt tightening".

It could actually be something as simple as cutting out your daily cup of coffee at work. That would save on average $15 a week which would more than cover the increase if you have a $250,000 loan.

Or Montgomery says you might consider looking at ways to reduce your commitments by consolidating debt.

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