How to handle rising interest rates like a pro
A significant contributor to the 'cost of living' crisis has been increasing interest rates, with banks currently testing prospective mortgage applications at rates between 8.5 and 9 percent; considerably higher than the 2-3 percent interest rates we saw in 2021.
If you're experiencing the financial pinch, manage any mortgage challenges with the following tips to keep your finances on track.
However, a note before you explore the following options: make sure that you first understand the realistic impact of an interest rate change on your financial position. It may not be as bad as you think, and knowledge is certainly power in this case.
Offset home loans
One approach to sorting your mortgage is to consider an offset home loan. This type of loan allows you to link other spending or savings accounts to your mortgage account. The balance in your linked accounts is then used to offset the interest charged on your mortgage, which can help reduce the interest you pay over the mortgage term.
With this, a family member may be able to step in with a linked account to assist with reducing costs.
Restructuring and refinancing
Another option is to restructure your home loan, which may involve fixing part of your mortgage (or floating it), locking in a new interest rate, revising your repayment amount, and/or setting a new term limit. The ultimate goal is to bring your loan into line with how much you can contribute.
A similar but distinct option is refinancing your mortgage. To be clear, refinancing means you replace your current mortgage with a completely new loan. Refinancing is often a path explored by those who feel let down by their current lender and means that you can structure your mortgage in a more financially savvy way.
Both of these choices could provide extra cash when you need it, and potentially save you money over the long term. However, it's often best to consider these when your loan is coming off a fixed term; otherwise, you'll need to review the possible gains against any potential break or repayment fees from your current loan provider.
Review your total household budget
When it comes to managing your finances, it's always wise to review your overall budget and look for ways to cut back on expenses; for example, meal planning cuts down on food costs and waste, and canceling unused subscriptions. Or could you increase your income by renting out a spare room through Airbnb or setting up a long-term tenancy? These can both be great ways to generate income while making use of any extra space.
While initially additional income should help you cover your mortgage payments, you may be able to pay off your mortgage faster or even retain some extra cash to put towards a rainy day or invest.
When renting out a room, for both short and long-term stays, it is important to be mindful of all policies and regulations and screen tenants to ensure that they are reliable and trustworthy.
If you are struggling to keep up with your mortgage payments, an interest-only mortgage may be an option to consider—as a last resort. This short-term solution means you pay only the interest on the loan for a finite period of time, which can help reduce your monthly payments and ease the financial strain.
However, it is important to use it carefully and only as a last resort. Be sure to seek professional financial advice and thoroughly review all options before making any major decisions about your mortgage.
Here at Total Mortgages, we work in partnership with you to explore a variety of options, find you the best deal, and ensure you feel supported to make informed mortgage decisions. Through all phases of the economy, both abundant and tough, our objective is to help you achieve your property goals.