On to the horizon – maybe distant but still distinct – has crept interest rate rises. While Reserve Bank governor Michele Bullock is calling the inflation spike temporary and suggesting it may naturally drop back to within the target band of 2-3 per cent, there is a chance it won’t.
And this, after mortgage holders have had only three of the many relief cuts we were once expecting. So, how prepared are you for a fresh interest rate threat? This is my safety checklist, because preparing for rising interest rates sometimes means you can avoid them entirely.
Offset accounts have gained in popularity in the past five years.Credit: Dominic Lorrimer
Check 1: Have you left your home loan repayments the same? I know this is about as appealing as a root canal, but falling interest rates are a gift for a mortgage-holder – they mean you instantly slash your interest bill and time in debt – if you keep your repayments the same.
Yes, that’s a tough ask with the cost of living squeezing us all hard. But let’s say you have a pretty typical $600,000 mortgage and today pay the advertised average variable interest rate of 6.13 per cent.
At the start of the year, that would have been more like 6.88 per cent. Your mandatory repayments have fallen from $4195 to $3914. It will – of course – take three hikes before they are back at that level.
Consider, if you at all can, upping them in advance, with the excess going to where you should always put house overpayments: into an offset account attached to your mortgage. This way they are not subsumed into the mortgage, making you reliant on redraw, but there for you as a bit of a war chest if rates go higher later.
Check 2: Are you paying no more than 5.2 per cent on your home loan? That 6.13 per cent I mentioned? The real opportunity is to ditch it.
But first let me explain that I will only ever provide you with the interest rates of products with a real offset account, which means interest rates from what are called authorised deposit-taking institutions.
We could see (and have seen) the many fake offsets catch out consumers – and the federal government’s Financial Claims Scheme does not apply to these. But instead of paying 6.13 per cent for a high-quality home loan product, you could be paying just 5.2 per cent (give it a quick google – there are several options).