The best ways to combat interest rate rises

8 March  2005

Right! Time to switch into defensive mode. Mortgage interest rates are going up and you need to act now to contain the impact that will have on your finances.

Action point No. 1: determine how much extra money a 0.25 percentage point increase in your current rate will mean you have to put on your mortgage each month.

On a $100,000 loan, it's about $16; on $250,000 it's about $40 (25-year term). The calculator at www.infochoice.com.au, under "home loans", will tell you the amount you'll have to find.

Action point No. 2: Decide whether you can afford this. Does it mean eating out once less a month? Cutting back on alcohol? Rethinking the gym membership and walking instead? Although unappealing, these sacrifices are all possible.

However, if the rate rise condemns you to a diet of rice - and this is action point No. 3 - look at how you can reduce your monthly repayments.

On the off-chance that your lender still offers a fixed rate below the rate you have been paying, you could fix part of your mortgage (I repeat part - I don't want you blaming me if rates defy expectations and go down. Fifty per cent has a nice ring to it).

If it doesn't, you could look at refinancing. In a determined play for newspaper column inches (and a successful one at that!) Westpac cut its two-year fixed rate by 0.2 percentage points to 6.59 per cent on the same day the Reserve Bank told us rates were up. (With any fixed rates, get a guarantee they will still apply when you settle.)

And on the variable rate front, Wizard and Resi recently engaged in a bit of one-upmanship - well, downmanship really - that has taken rates on their basic home loans to 5.83 and 5.85 per cent respectively (no extra repayments, no redraws). Wizard's will probably be up 0.25 by tomorrow while Resi has yet to make a rate decision.

The beauty of refinancing when you're feeling the pinch is that you spread your outstanding loan balance over a fresh 25 years, effectively starting the clock ticking again with lower minimum monthly repayments.

You can reduce them even further by going over 30 years.

But there are quite a few associated costs - exit and discharge fees, and if you've had your loan less than four years, deferred establishment fees, as well as valuation, application and legal fees, and stamp duty.

Ideally, you'd want to refinance to a lower rate so that, over the life of the loan, you get these back.

Our best mortgage rates table on page 12 shows what was on offer on Friday. It's expected that many rates will go up tomorrow, although the non-bank and smaller lenders may be slower to move.

If one piques your interest, ask that company and your existing lender what fees you would incur by changing and then plug the respective interest rates into Infochoice's calculator to see whether you would save more over the life of the loan than you would pay upfront.

A further way you could reduce your monthly repayments is to get the Tax Office to pay some for you.

Although quite drastic, by converting your house into an investment property and renting a place yourself, you will get tax deductions for interest and running costs.

Which brings me to my fourth and final action point: if at all possible, overpay your mortgage.

There is no better way to combat rate increases than by building a buffer between you and default.

Reproduced from Sydney Morning Herald newspaper.