In this article:
As the property market continues to boom, experts expect lenders and regulatory authorities to step in to prevent further overheating by raising interest rates. Here’s a quick look at what an increase in interest rates means for existing and prospective borrowers
#1 Prospective borrowers
If you are looking to make a purchase any time soon, an increase in interest rates will make it relatively more challenging to get finance 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 unlikely to be accompanied by a reduction in living expenses or a rise in income, you may have to settle for a lower loan amount as a prospective buyer. It is best to therefore act fast in case you are looking at buying property. Acting fast, however, does not mean that you should hasten your decision by compromising on proper due diligence associated with purchasing a property. Property is a long-term financial commitment and skipping necessary checks could have adverse financial outcomes for you in the long run. For a complete guide on moving quickly but rationally in a booming property market, click HERE.
Learn how much you can save through refinancing.
#2 Existing Borrowers
A rise in interest rates will increase your repayment size. If you already have a mortgage, you have been given a home loan against a ‘test rate’. A test rate is usually 1-2% higher than your current interest rate. Lenders generally check a prospective borrower’s home loan repayments capabilities against this rate. So, you can afford to make larger repayments. There are two approaches that you could consider in case of a potential rate increase.
- If you can, pay in extra or make larger repayments. This will allow 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. Additionally, 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,
Opt for professional advice for a more focused approach to managing your mortgage in case of a potential increase in interest rates. Consider engaging 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. Did you know that your mortgage broker can continue to guide you on strategies to pay off your mortgage sooner, even after the settlement of your loan? Click HERE for more information on how your mortgage broker can continue to support you even after your loan settlement.
Reach us for the best way forward as per your circumstances.
The information is a compilation from various sources for your benefit and should not be relied upon in lieu of appropriate professional advice.