50 things you can do now to beat a rate rise

Over the past couple of years, interest rates have fallen about as much as they are likely to. Now the pundits and soothsayers are scrutinising their tea leaves and chicken entrails in an attempt to work out when interest rates will rise and by how much. Here are 50 things you can do now to keep ahead of the inevitable rate rise.

by Gregan McMahon

1. Fix now
A few years ago it would have been simply unimaginable that you would be able to get a standard variable home loan in Australia with a rate of just 6.6 percent. But rates look like they have gone as low as they are likely to go. And as a wise man once said, "What goes down, must come up". It is almost inevitable that interest rates will begin to rise soon. The only real question is, by how much? So the dilemma is - when should you fix and for how long.
At the moment the best long term interest rate available is 7.41 percent for a five year rate (HongkongBank) and Westpac’s 8.99 percent for a ten year rate. Locking in your money at these rates will give you a nice warm feeling in your hip pocket when rates start that long journey back up.

2. Skip the honeymoon
Honeymoon rates have long been an important marketing tool for lenders. The idea is to offer you a cheap rate to get you in the door and then try to keep you there at a higher rate for as long as possible (which allows them to make money on the deal).
But beware of lenders bearing gifts. You may find that in a climate of climbing rates a honeymoon is a bad idea. Most lenders roll your loan over to their standard variable rate when the honeymoon is over. They also can hit you with fairly steep exit penalties if you want to refinance before you have been on their standard variable rate for two or three years.
In an atmosphere of rising rates this means that the discount you receive in the honeymoon period can be wiped out very quickly during the time you are locked into the lender’s standard variable rate.

3. Shop around and make sure your bank knows it
One of the most powerful tools you can have in the search for the best home loan is information. Make sure you have rung half a dozen lenders before you start talking to your bank about getting a new loan or refinancing your existing loan. Make sure you know what rates and features are offered by each of them on comparable products. Be ready to tell the bank what you are looking for and don’t be afraid to…

4. Negotiate
One adage that makes its way around the YMM office from time to time is "No hide, no Christmas present", meaning "if you don’t ask for it you won’t get it". Remember that competition among lenders is at unprecedented levels at the moment. They are all dead keen to get your business. We rang a lender anonymously to enquire about a fixed rate. When we told the loans officer we’d spoken to other institutions which had lower rates, the loans officer said "If you can find a better rate elsewhere, we’re happy to negotiate".
Try twisting their arm a little bit. Asking your lender for half a percent off their rate might not work, but see whether they will give you a break on establishment costs or ongoing fees.

5. Get a redraw
A redraw facility allows you to pay extra money into your home
loan and take the excess back when and if you need it. This means that while interest rates are low you can plough as much of your salary as you can into your loan. When rates go up you will have established a buffer which you can draw on if things start to get tough. Paying extra off your home loan can also save you years off your loan. And with a mortgage, time really is money.

6. Get a cheap loan, pay at an expensive rate
If rates are on the rise, why not get in ahead of them? Get a variable loan with the lowest rate you can find (or, better still, a fixed loan that allows you to make extra repayments), and make your repayments as if rates are what they were a couple of years ago. If you have a loan at seven percent and you are paying it off at 10.5 percent you won’t even notice when rates go up. And you’ll be paying off your loan quicker and saving yourself a packet.

7. Pay it off quickly
As we said before, time is money. There are all sorts of strategies for paying less interest on your loan, but most of them boil down to one thing. Pay your loan off as fast as you can. Consider the following example of a loan of $100,000 at seven percent interest:
If you pay out the loan over a term of 25 years your monthly repayment will be around $707. This equates to a total repayment of $212,100 over the term of your loan.
If you pay the loan out over 10 years rather than 25 your monthly payment will be $1,161 a month (ouch!). But the total amount you will repay over the term of the loan will only be $139,320 - including your principal of $100,000 - a saving of a whopping $72,780!

8. Make your repayments more often
The simple things in life are often the best. One of the simplest and best strategies for reducing the term and cost of your loan (and thus your exposure should interest rates rise) is to pay fortnightly rather than monthly. How could this make a difference I hear you ask? It works like this:
Split your monthly payment in two and pay every fortnight. You’ll hardly feel the difference in terms of your disposable income, but it could make thousands of dollars and years difference over the term of your loan. The reason for this is that there are 26 fortnights in a year, but only 12 months. Paying fortnightly means that you will be effectively making 13 monthly payments every year. And this can make a big difference.

9. Hit the principal early
If rates start to slide up, do whatever you can to reduce the amount you owe on your property. Put extra money in, use a little self sacrifice - do whatever it takes but get that principal down. When rates go up they will only apply to what you owe. If this is less than it would otherwise have been, the interest rate hike won’t hurt nearly as much.

10. A dollar today vs a dollar tomorrow
An important issue to come to terms with when choosing a home loan is the time value of money. The essence of this theory is that a dollar today is not necessarily worth the same as a dollar in the future. Consider the example of two otherwise identical loans, one with a $1000 upfront fee and the other with a fee of $100 per annum over 10 years. Which is the better loan?
With the second loan you can pay your $100 dollars at the start of the loan and put the other $900 in an interest bearing account. At the start of the second year you can pay the second $100. At the start of the third year you can pay the next $100 and so on. Because your money is sitting in your interest bearing account for longer (rather than that of your lender), you are better off.

11. Get a package
Speak to your lender about what financial packages they have on offer. Some offer discounted home insurance, some offer fee free credit cards, some offer a free consultation with a financial adviser or a fee free transaction account. While these things may seem small beer compared to what you are paying on your home loan, every little bit counts and sometimes you can use little savings on other financial services and turn them into big savings on your home loan.

12. Consolidate
If your home loan rate starts to rise, you can be absolutely positive of one thing - that your personal loan rate will rise and so will your credit card rate and any hire purchase rate you may happen to have. Another thing you can be almost certain of is that the rate you are paying on your credit card and personal loan will be higher than your home loan. Many lenders will allow you to consolidate all of your debt under the umbrella of your home loan. This means that instead of paying 14 or 15 percent on your credit card, you can transfer this debt to your home loan and pay about half the interest.

13. Split your loan
A split loan, or combination loan as they are often known, allows you to take part of your loan as a fixed and part as a variable. Essentially this allows you to hedge your bets as to whether interest rates are going to rise and by how much. If interest rates rise you will have the security of knowing part of your loan is safely fixed and won’t move. But if interest rates don’t go up (or if they rise only slightly or slowly) then you can use the flexibility of the variable portion of your loan and pay that part off more quickly.

14. Take out a longer loan
Yes, I know we said that the best way to beat the lender is to pay off your loan quickly, but it depends on your circumstances. For some of us, it is the cash in the hip pocket that means the most. If this is the case, don’t rule out taking a 30 year loan instead of a 20 year loan. Your repayments will be smaller, and thus the difference in your lifestyle will be less pronounced when interest rates go up.

15. Get a low start loan
If you think that your income is going to rise in the near future you might find it worth your while to get a loan with a cheaper rate early in the loan. As rates (and thus your repayments) rise in the future, your income (and thus your ability to make repayments) will be rising too.

16. Get a high start loan
On the other hand if you have plans to start a family, or if your income is likely to decline in the near future, it may be worth your while paying as much off your loan as you can now and reducing your repayments down the track.

17. Get a cheap rate and invest the difference
When interest rates are low, it is usually safe to say that inflation is also low. Thus, bricks and mortar may not be the best place to invest. Try getting the cheapest loan you can find and paying the minimum repayment. Use the extra cash to invest in other areas. You may find that the return you get on shares or some other type of investment means that you have created a nice little buffer against the rigours of rising rates. But beware - high returns often mean high risks. Before undertaking any investment, invest in a consultation with a qualified financial adviser.

18. Use your equity
If you have already paid off some of your home, you are said to have equity. Equity is the difference between the current value of the property and the amount you owe the bank. If you are careful, you can use this equity to your advantage and help to minimise the effect an interest rate rise might have on you. Many lenders will allow you to borrow using your equity as collateral. Using an equity loan to improve your property could be a good way to make sure that your home increases in value faster than interest rates rise.

19. Switch to a lender with a lower rate
It may sound like a simple statement but switching out of your current loan and taking out a loan at a lower rate can help to protect you against the rigours of an interest rate rise. If you have a loan that is tricked up with all the features, or even if you have a standard variable loan, you might find that you could get a no frills rate that is as much as a percentage point cheaper than your current loan.

20. Make inflation your ally
When rates rise it is likely that inflation will also be on an upward curve. To maximise your gain if you are an investor (or minimize the potential damage if you are a home loan borrower) you need to make sure the value of your property is rising at least as fast as inflation - faster if possible. Make sure you look carefully at the area you are buying in. Does it have a good capital gain history? It’s a good idea to get some historical information about property prices. Services such as the Sydney Morning Herald Home Price Guide, published by Australian Property Monitors (a company associated with the publishers of Your Mortgage Magazine) can give you insight into property prices in your area. Call (02) 9360 6700 for more information.

21. Know what your loan costs are
Principal and interest repayments are not the only things about your loan that are going to cost you money. It is vitally important to know what you are going to be up for in other fees and charges, both at the beginning of your loan and over the period of your loan. Keep an eye on fees such as valuation, establishment and legal fees which you will cop at the front of your loan. In many cases these are unavoidable. In some cases, the upfront fees will reduce the rate you pay over the term of the loan, so it is difficult to tell whether you will be better or worse off paying higher upfront fees. The way around this is to look for the comparison rate. The comparison rate (which is published in the tables at the back of this magazine) takes into account the initial and rollover interest rates as well as the upfront and ongoing fees. It gives you the best indicator of the real cost of the loan.
It also pays to look at the costs you might incur during the course of your loan. Fees to look out for include exit fees and mortgage discharge fees (which are not necessarily the same thing), ongoing fees which can be as much as $10 a month and portability fees - which you might incur if you move house and want to take your loan with you.

22. Find a loan that pays you money
On the subject of fees, both upfront and ongoing, make sure you investigate the various offers available from lender with you get money. Some lenders offer new borrowers cash bonuses to help with exit costs on their current loan and AMP’s PriorityOne Bankbeater loan pays borrowers $8 per month rate than charging and ongoing fee.

23. Don't be fooled by the bells and whistles
As with all things, with a home loan each extra feature will cost you money. Sit down before you take out a loan and work out the features that are really going to make a difference to you. Do you need a redraw facility? Is loan portability likely to be a necessity? If you don’t need it, find a loan without it. It should be cheaper.

24. Watch for the signs that rates are on the rise and move fast
Read the financial pages of the newspaper. Keep an eye on the TV news. What are the experts saying? If the economy is starting to move then interest rates might be on the way up. Find out when the Reserve Bank meets. If rates are going to move, move with them. Use the information contained in these pages to your financial advantage.

25. Wait until you've got a bigger deposit
Look at the amount you have saved for your deposit - does it take into account the fact that you will probably end up paying around five to six percent of the value of the property in fees, stamp duty and other costs? Maybe you’re not ready to buy yet. Maybe it’s time to save a little more, especially if this means that you can borrow less (see point 27) and perhaps even avoid mortgage insurance (see "Insure to be sure" on page 34.)

26. Forego those minor luxuries
This is the bit you don’t want to read. Once you have a mortgage, your life is likely to be luxury free. Think of all the weight you will lose by giving up your favourite indulgent snack. For the sake of your health you should quit smoking and drink less anyway. All the money you save should go to reducing your principal and saving you money in the long run.

27. Borrow less
If interest rates look like they might be on the way up, it might be time to compromise on the home you have in mind. Borrowing to your absolute limit when rates are low could be a big mistake. Where’s the extra going to come from when rates rise? MasterCard?

28. Stay informed - don't forget about your mortgage
The temptation is always to let your mortgage roll along, make your repayments as they are due and think as little about it as possible.
This can be a big mistake. Keep yourself up to date with what’s happening in the marketplace. You might find that there’s an opportunity to put yourself well ahead of the game.

29. Get a mortgage simulator or calculator
Plan for the future. There are a number of mortgage calculators and simulators available including the one at http://www.yourmortgage.com.au/calculator/index.htm. Use them. Try to predict what might happen if rates were to rise one or two percent. Think of how you would respond and budget accordingly.

30. Budget for a rainy day
Saving your deposit should have taught you a few things about stretching your pay cheque. Use what you have learnt. Your days of self denial are not over yet. If you can set aside a little each week, fortnight or month, you will be doing two things: Building a stash of cash that you can use in an emergency and conning yourself that you can survive on a little less than you get each pay. Both of these things are going to help a lot if interest rates start to climb.

31. Make your mortgage your key financial product
There are a number of mortgage products that allow you to use your mortgage as your key financial product. Having a mortgage that you can pay all of your income into and draw on for living expenses as you need to, using a credit card, EFTPOS or a cheque book, can make a huge difference to the speed at which you pay off your loan. Because your whole pay goes into your mortgage account you are reducing the principal on which interest is charged. Sure you might take a couple of steps back as you withdraw living expenses, but careful use of this sort of product can get you thousands of dollars ahead of where you’d be with a "plain vanilla, pay once a month" home loan.

32. Run an offset account
Instead of earning interest, any money you have in your offset account works to offset the interest you are paying on your home loan. For example if you have a loan of $100,000 at 7 percent and an offset account with $5,000 in it earning 3 percent. This means that $95,000 of your loan is accruing interest at 7 percent but the rest is accruing interest at 4 percent (7 percent on your loan less the 3 percent the $5,000 in your offset account is earning). Of course, the best sort of offset account pays the same rate as your loan.

33. Pay all your mortgage fees and charges up front
Some lenders allow you to add to the amount you borrow instead of coming up with cold hard cash for your upfront costs such as establishment fees, valuation fees and lender’s legal costs. While this can seem a blessing when you take out your loan (and it feels like you’ll never have a cent again in your life) try to avoid doing this. Consider the following example:
Borrower A borrows $100,000 over 25 years at 7 percent. Her upfront costs are $1,000 but she has enough cash to make sure she can cover these. Her monthly repayment is $707.
Borrower B takes out the same loan but doesn’t have enough cash to cover the upfront costs. So he borrows $101,000, again at 7 percent over 25 years. His monthly repayment is $714. While $7 per month may not sound like much, it means that over the course of the loan, Borrower B will pay $1100 more than Borrower A.

34. Pay your first installment before it's due
With most new loans, the first installment may not become due for a month after settlement. If you can manage it (and your lender will let you), pay the first installment on the settlement date. If you do this, you will be one step ahead of the lender for the term of your loan.

35. Make sure your loan is portable
If there is any chance that you will move house during the course of your loan (and let’s face it, there’s a strong chance), make sure that your lender will allow you to transfer your loan to a new property and that it won’t charge you the earth for the privilege. If you have to get out of your old loan and into a new one if you sell up and buy a new house, you could find yourself down thousands in discharge costs on your old loan and establishment fees on your new one.

36. Get to know your lender
Some lenders, especially the larger ones can seem faceless, impersonal and monolithic. You might find it worth your while to develop a relationship with one particular lending officer within the organisation. A lending officer who is familiar with your loan can save valuable time when it comes to an enquiry. It might also mean that you can do a little extra arm twisting when rates or fees start to rise.

37. Tell your lender if you're in trouble
If the unthinkable should happen and you find yourself unable to meet your repayments, get in touch with your lender IMMEDIATELY. If you let the matter slide it will be all the more difficult to find a successful solution. Remember the lender wants you to be able to repay your loan. If you don’t they will find themselves out of pocket. Kicking you out of your home and selling it is an absolute last resort. If you find yourself in financial trouble, for whatever reason, sit down with your lender and talk about ways in which you can continue to pay, perhaps over a longer period at a lower rate.

38. Free advice is worth what you pay for it
Never base any important financial decisions on something a mate might tell you. Base your actions on the advice of a professional financial adviser - in most cases they will know what they are talking about. And if they happen to give you bad advice they’re insured, so you can sue them.

39. Don't make hasty decisions
Rates are low at the moment. Simply because you can afford to make repayments on your loan now, will you be able to afford them if rates go up? Make sure you look at circumstances now in the light of what might happen in the future and make your decision on whether (or how much) to borrow, accordingly.

40. Renovate wisely
There are renovations, and there are renovations. Before you do any work on your property, ask yourself this question. Why am I renovating? If the answer is you want to spend the money so your home will be more comfortable - then go ahead. If you answered that you want to add value to the property for more capital gain when you sell it, think hard about what you are about to do. While almost all improvements will add value to your property, some might not add as much value as they cost you. Do some research into what home buyers want in your area. For example, it might turn out that people prefer a backyard to a pool.

41. Think about an interest only loan
With an interest only loan the borrower pays only the interest due on a loan during the term and must repay the full amount borrowed at the end of the term, which is usually about three to five years. This means, of course, that your monthly (or fortnightly) repayments will be considerably less. For example, the monthly repayment on a principal and interest loan of $100,000 over 25 years is around $707. On an interest only loan of the same amount, the repayment is only about $583 a month. This can be a useful cushion if rates start to rise. It can also mean that the extra money can go into renovations or other investments.

42. Shop around for legals and conveyancing
Since the legal fraternity experienced something akin to deregulation in the 1980s it has been possible to get a relatively good deal on conveyancing. Shop around. Ring your solicitor or ask around for recommendations. Look in the Yellow Pages for conveyancers (para-legal professionals who specialise in this area). Speak to organisations such as the Law Consumers’ Association (02-9267 6154) who offer "do-it-yourself" conveyancing kits. You might find yourself hundreds of dollars ahead.

43. Know your limitations
Falling in love is dangerous. Every home hunter knows the feeling of seeing a property that is just perfect. It has everything you could ever want or need in a home. It is a "must have". The problem is that it is a few thousand more that you can really afford. With interest rates low, as they are at the moment, you might feel that you can squeeze an extra $50 or $100 a month out of your budget for repayments. But what happens when rates go up? Make sure you set your price limit and stay below it, no matter how perfect that property may be.

44. Avoid bridging finance like the plague
A wag who once worked for YMM said bridging finance is so called because it allows you to "pylon" the debt (geddit? geddit?). The joke’s appalling, but so is bridging finance. Unless you get your timing right you could find yourself with two home loans at the same time - with the bridging finance element costing you an extra couple of percent premium on the standard variable rate. And if rates decide to rise…

45. Choose the loan that suits your needs
Choosing a loan is about knowing what you want. Make a list of all the features that are important to you and give them an importance ranking. Draw up a grid of potential home loans and give the ones which have the appropriate features a score - one for important, two for very important, three for indispensable. Use this technique for ranking the loans on offer.

46. Insure your livelihood
Many borrowers choose to take out mortgage protection insurance. This guarantees your income should you become unemployed or incapacitated. There are varying levels of income protection insurance. Some protect your income (or at least a proportion of it), others simply ensure that your mortgage repayments will be met for the duration of your inability to make repayments. While this is an extra expense, for the extra cautious it is also extra security. See "Insure to be sure" on page 34 for more information.

47. Don't be afraid of small lenders with cheap rates
Since the advent of the mortgage managers over the past five years we have heard a lot about these "non-traditional lenders" and how they have forced interest rates down. Now that some of the non-traditional lenders have grown large, their rates are little different to those of the banks. Some borrowers are concerned about what might happen if their lender gets into financial trouble. Our advice is to keep in mind that you are the borrower and they are the lender - so don’t worry too much. There are some smaller lenders whose names might not be as familiar, but whose rates might be enough reason to get in touch. Check out lenders like Collins Securities and BMC, who have some very competitive rates.

48. Find out if your profession will get you a discount
Some lenders offer discounts to specific professional groups or members of professional organisations. These discounts can be as much as one percent off the prevailing rates. Ask your lender if your occupation qualifies you for any discount. You might be pleasantly surprised.

49. Buy the next issue of YMM
Information is your greatest weapon against the mortgage monkey which has taken up (or is about to take up) residence on your back. By keeping informed about what is going on in the home loan market, you might be able to stay one step ahead of your lender. You can keep up to date with interest rates at the YMM Online web site at www.yourmortgage.com.au

50. Win the lottery
When you’re rich, you can pay off you entire mortgage and say "bye-bye" to your lender for ever!

  

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