Don't panic by bad news and be rushed into
making a decision based on reporter's knee jerk reactions
to the interest rate rises. Everyone's financial circumstances
are different and there are often quite straightforward solutions
to problems. You need to be aware that the opinions of experts
are often just that. For example, while many experts are talking
about another interest rate rise before the end of this year,
others are suggesting rates could fall next year.
If you are feeling pressured by your mortgage and other debts,
consider ways to reduce the payments. One thing worth checking
is whether you already pay more than required or by consolidating
your more expensive debts (personal loans and credit cards)
into your home loan, you could halve your monthly repayments.
If you are on the brink of making any investment
that involves borrowing a large amount of money, either for
a home or an investment property, subject yourself to a stress
test. Check your income to assess how you'd cope if interest
rates were much higher at the end of this year by sitting
with a Chocolate representative and going through various
'what if' scenarios.
If you are tempted to borrow money to invest
in the share market, perhaps because the price of some stocks
has fallen, don't rush into it. Always regard such investing
as a long-term strategy. Make sure to check if you could afford
the interest payments, should rates increase again. (another
good time to sit with a chocolate Lending Consultant and go
through scenarios)
Consider positive gearing for share investments,
especially during volatile times. This means limiting your
borrowing to a point where your investment portfolio will
pay for itself. That is, the portfolio is self-sufficient
because dividends cover the interest payments.
Don't be distressed if you recently put money
into a term deposit at a lower interest rate. If it is an
investment where you reinvest the income when the term deposit
rolls over, the income will be reinvested at higher rates.
This will boost your long-term return. When interest rates
are volatile, consider shorter-term investments that offer
the best rate. But make sure you roll these over when they
mature to an equally attractive investment.
If possible, keep some money in a cash
fund for an emergency. Leaving it in an offset account may
be the best way to save money on your home loan at the same
time.
Have a budget - and then try to beat
it. You can save a lot on petrol if you have a fuel economic
car. Always shop around for large items like televisions,
computers or white goods. There can be huge price differences
at different stores - and don't be shy about haggling.
If there is no money left over at the
end of the month, consider locking in your current home loan
rate to ensure you don't get 'pushed over the edge' and cannot
afford to meet repayments with any future rises.
Avoid expensive credit cards unless
you plan to pay off the balance within the interest free period.
Where you can't rid yourself of a sizeable credit card bill,
consider converting to a lower-interest debt by setting up
a cheaper interest line of credit linked to your mortgage.
But make sure you pay it off. Or opt for a cheaper credit
card, perhaps one that charges little or no interest on debt
transferred from another card.
Robbing Peter to pay Paul less
A mere 0.25 of a percentage
point increase in rates equates to just one bottle of reasonable
wine per month, or $17, for every $100,000 outstanding on
a home loan. That's good news, perhaps, for sensible borrowers,
but could force the debt-challenged to rethink their mortgage.
Housing affordability is at one of its
lowest points in a decade and even though the buoyant economy
is likely to limit mortgage defaults, some household budgets
are as stretched as when interest rates rose above 17 per
cent in the early 1990s. Rates may be less than triple the
amount it was then.
In June 1989, when mortgage rates reached
17 per cent, monthly repayments on the average $66,700 new
home loan were $959 or 25.8 per cent of household disposable
income. After Wednesday's increase, repayments on the current
average loan of $222,200 account for 28.2 per cent of disposable
income, according to CommSec chief equities economist Craig
James
There are few ways to ease the strain other
than refinancing to a cheaper loan, Moving lenders incurs
fees, sometimes high ones, but the eventual cost savings can
ease cash flow problems or create surplus cash for extra loan
repayments. The latter is a useful strategy as it reduces
the principal amount owing on a loan, thus cutting the dollar
value of monthly interest charges. It's a commonsense tactic,
equally relevant to credit cards, and other loans, but one
often forgotten in an era of easy debt.
"We see people in their 40's with high
debt but no repayment schedule. The modern view is that debt
is like an ATM... For new cars or world trips." Says
Robert Keavney from financial advisory firm Centric Wealth.
"It's usually not recognized until people
see retirement on the horizon and think: 'I haven't saved
what I need and what I've got needs to pay off the house',"Keavney
says.
Fixed rate loans are an option for people
with no surplus cash to cover further rate rises. But if rates
do not rise again, or even fall as predicted by AMP Capital
Investors chief economist Shane Oliver, borrowers could be
locked into a loan that is no longer good value.
Cheap variable mortgages offer rates that
are up to 1.1 percentage points lower than the 7.82 percent
standard variable rate that is likely to be charged by major
banks following Wednesday's rate rise. Infochoice, an independent
research house, reckons the cheapest lenders include the Electronic
Loan Company, Sapphire Mortgage Services and one direct, a
new offshoot of ANZ. HomePath, another cheap lender, is part
of Commonwealth Bank.,
Some cheap loans have much the same features
as more expensive products, such as the ability to make and
then redraw extra repayments. Sometimes these loans have restrictions,
such as a limit on redraw, but these could prove a minor inconvenience
compared with the interest saved as a result of the lower
rate.
Someone who borrows $250,000 at a rate of
7 per cent, for instance, will pay $39,863 less interest over
25 years than someone who chooses a loan with a 7.82 per cent
rate.
Opting for a cheap
credit card (there are plenty about) should have a similar
effect. Three institutions - BankWest, Newcastle Permanent
Building society and St.George - have credit cards with interest
rates of about 9 per cent. Others, such as virgin, Charge
slightly higher interest rates but don't
charge an annual fee.
Harry Pontikis is the Director of Chocolate
Home Loans. Harry leads a team of 48 mortgage brokers who
specialise in home loans, business loans and commercial loans
Australia wide. http://www.chocolatefinance.com.au