If you currently have a loan that’s fixed at a rate much lower than variable rates, you may be feeling quite comfortable with your position right now. As variable rates continue to rise around you, you’re happily sleeping at night knowing that for the next 6/12/24 months, your interest rate – and monthly repayment – will remain the same.
However, now is not the time to be complacent. Because when your fixed rate loan term expires, you will need to be prepared – and able to pay for – quite a jump in your monthly repayment amount.
We’ve always favoured a proactive approach. So, here are some things we recommend you do now to ensure you’re ready for the day your fixed term expires.
1. Save where you can and boost your cash reserves
We completely understand this is easier to say than do – especially with increasing cost of living pressures. However, it’s important you reign in unnecessary spending where possible now to boost your cash reserves as much as you can.
When your fixed rate loan reverts to variable, your minimum monthly repayment commitment will undoubtedly increase. If you’ve built up cash reserves, this cash will help you cover the increase in repayments, when they eventually kick in.
(Building up cash can have a double-whammy effect if you’re building cash in an offset account linked to a variable rate loan. Read our tips here to ensure you’re using your offset account effectively)
2. Reduce your debt levels
Increasing interest rates have more of an impact on those with higher debt levels. So, try to pay down/off as much of your debt you can.
If you can manage it, start to make additional repayments to your home loan. Making additional repayments to your loan will reduce the principal balance you owe, which then helps to reduces future interest incurred.
(If you’re worried about losing access to this cash, we suggest you check with your lender that redraw is enabled on your loan. With redraw enabled, any additional funds will sit in the loan account itself – reducing interest costs, but still available for you to draw back out any time you wish.)
You need to be careful about making additional payments to a fixed rate loan however, because the fixed rate loans typically have limits as to how much in additional repayments you can make per year.
As such, if you have a variable rate loan in addition to your fixed rate loan, it most cases it makes sense to make additional payments to the variable rate loan instead. Firstly, variable rate loans typically don’t limit how much in additional payments you can make. And secondly, the rate on this variable loan is likely to be higher – so it would make sense to pay down your more expensive debt as the priority.
3. Conduct a review of your finances/ explore lending options
Whether it’s possible to re-jig your current home loans (with your fixed rate loan remaining), will heavily depend on the lender and the structure of your loans.
But anything you can do now to reduce the burden on your monthly cash flow is going to help.
If you’re wanting to review your loans, we can help with this. Just entering a few details here and we’ll be in touch to get things started.
