The instability in world finances has a direct impact on everyone with debt, none more so than homeowners. Rising interest rates are unwelcome but are a fact of our financial lives, so it pays to be prepared. Most importantly, it’s vital that your know your financial limits – just being able to make your repayments now is going to turn into a nightmare if rates increase down the track, and the chances of defaulting on a loan then become much greater. It’s not just home loans than can be affected – taking into account all of your current and future finances, from cash loans to car loans, is something we should all look at to make sure we are ready.
Make extra repayments now
Reducing your debt while interest rates are lower is the best way to prepare for future interest rate rises. You can do this in two ways. Firstly, pay more than the minimum repayment on your loan, and do it regularly. This will provide you with surplus funds if rates rise and in the process will give you confidence to ride out the rates storm. Paying extra also reduces the life of your loan, which in the long run will save you thousands of dollars. Secondly, consider making a lump sum payment against your loan. If you are lucky enough to have some extra cash, use it to pay off some of your loan. It has the same benefits as paying more than the minimum amount each repayment cycle, but leaves you with the extra cash you would otherwise commit on a weekly, fortnightly or monthly basis.
Loans health check
Interest rates don’t suddenly jump overnight – there are plenty of indicators which give us prior warning, and they shouldn’t be ignored. So if everything points to interest rate rises, and especially a prolonged period of increases, then a check of your loan situation is a good idea to make sure you are getting the best product for your needs. The use of a broker can be a big advantage in this situation as they can take into account your current loan and match it against what else is available. They can then make recommendations with an expert eye on the future. It may be that switching from a fixed to a variable rate is the best bet, or consolidating several loans into one. Just remember that the fees associated with moving from one loan to another can often nullify any future savings through lower rates. Have a look around the internet as well – just like getting car insurance quotes, it can be simple and secure to get some information and advice that can put you on the right track.
Stick to your budget
If you haven’t got a home budget then it is hard to keep a track of your finances and exactly where all the money is going. So it makes good sense to formulate a budget and stick to it. A good budget that has been well thought out will reveal any cash “leaks” and identify where you can cut back on spending and potentially put it into reducing debt or making extra loan repayments. It’s also important to save money as well and any surplus funds identified in your home budget can be put away for a rainy day. Rising interest rates can also be used in your favour – when they do go higher, consider putting that extra cash into a term deposit where you will earn extra interest as rates rise.
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