What does an increase in interest rates mean for borrowers?
As the property market continues to boom, lenders and regulatory authorities often intervene to avoid interest rates from running rampant. So what does this mean for you as the borrower?
1. First Home Buyers
For first time home owners, an increase in rates will require more from the borrower to get finance secured as your repayment size will be higher. To now be eligible for the same home loan amount, you would require
- A higher income
- Lower living expenses
- Or a combination of both
Since an increase in interest rates is likely to be accompanied by an increase in living expenses but not always a higher income, you may have to settle for a lower loan amount as a borrower. It is best to consult a lending expert who can do the heavy lifting for you in the home loan process. Thought a home loan is a long term financial process, consulting a home loan expert and moving quickly is both ideal and strategic.
2. Existing Borrowers
A rise in interest rates will increase your repayment size. Once you have secured a home loan, you are given a ‘test rate’. A test rate is usually 1-2% higher than your current interest rate and lenders use check a potential borrower’s home loan repayments capabilities against this rate. Here is how you can potentially protect yourself against a interest rate increase:
- If possible, pay in extra or make larger repayments. This allows you to pay off a more significant portion of your home loan principal and reduce the overall interest you pay during the life of your loan. Subsequently, it will also prep you and your family to make larger repayments when interest rates increase.
- If you can’t make larger repayments, consider prepaying the entire interest of your home loan for the year (before the new financial year begins). This method reduces the overall tax you need to pay. Do note that this approach requires you to fix your interest before making the yearly interest payment.
- Consider professional advice for a more focused approach to managing your mortgage in case of a potential increase in interest rates through a mortgage broker. Lenders pay mortgage brokers a commission once they settle a loan. Mortgage broker services are therefore generally free for existing and prospective borrowers. A mortgage broker can continue to guide you on strategies to pay off your mortgage sooner, even after the settlement of your loan.