Australians insure their homes, cars and even their pets, just in case something goes awry, so it makes sense to also be prepared for when interest rates inevitably rise from their current record lows.<\/strong><\/p>\n John Tindall, a Choice Home Loans<\/a> mortgage<\/a> broker in Wattle Grove, Sydney, says many people have only experienced declining rates in the past 20 years, so few are prepared for the \u201cextra bite out of their surplus income\u201d when rates head north and repayments rise.<\/p>\n \u201cA half a percent increase on a $600,000 loan will add $2100 a year to repayments. That could be a family holiday lost,\u201d he says.<\/p>\n You need to make sure your household budget can cover future interest rate rises. Picture: Getty<\/p>\n<\/div>\n Tindall explains how homeowners can plan a rate rise buffer.<\/p>\n \u201cThere are a number of ways to insulate your family budget against a rate rise,\u201d he says.<\/p>\n \u201cPutting spare cash into an offset account is a very good option, since it reduces your payable interest and gives you a \u2018slush fund\u2019 should you need to make additional payments.\u201d<\/p>\n \u201cFixing the interest rate when you think the time is right is another good option, because it gives you certainty over the term of the fixed period. It\u2019s a trade-off between certainty and flexibility,\u201d Tindall says.<\/p>\n Pros and cons of fixing your mortgage rate:<\/strong><\/em><\/p>\n Offset accounts are not generally available on fixed rate loans though.<\/p>\n \u201cGenerally speaking, the longer you want to fix, the higher the interest rate could be too,\u201d he adds. Tindall says speaking with a banker or broker to understand the options is important.<\/p>\n \u201cA third option is to make additional repayments, reducing the loan size and again paying less interest.\u201d<\/p>\n Tindall says most lenders<\/a> already assess applicants on their ability to pay between 7-7.5% interest rates.<\/p>\n \u201cThe logic is that if you can repay a loan at 7% plus when rates are at around 4%, then you should be able to adjust without too much stress,\u201d he says.<\/p>\n \u201cSome people, however, spend all their surplus income on lifestyle and should a bite happen, their lifestyle spending may have to be tightened.<\/p>\n \u201cWe provide our clients with a budgeting spreadsheet, so they can adjust to their mortgage in the early days and again should circumstances change,\u201d Tindall says.<\/p>\n
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