And What You Can Do to Cope
Firstly, a disclaimer: this is not financial advice. Implementing any of the suggestions here is a personal decision and depends on your situation. If necessary, speak with your accountant for more detailed advice and their opinion. The options listed here are simply that — options for you to consider. I recommend obtaining advice before making any critical decisions.
Escalating interest rates may significantly affect your financial health, especially if you have a home or investment loan. Here are a few strategies for dealing with growing interest rates:
Refinance your Loan
Despite high rates in the current market, many homeowners still pay more to the bank than necessary. Refinancing can give you a cash rebate of up to $4,000, and even a small discount on your current interest rate can be helpful.
Pay off High-Interest Debt First
Focus on settling high-interest debts, like those from credit cards or personal loans. Once those loans are paid off, consider putting those loan payments towards your home loan.
Check your Budget
Easier said than done, but consider reassessing your budget: growing interest rates can inflate your monthly costs, so reviewing your budget and identifying areas where expenditure can be reduced is critical. This can assist you in staying aligned with your financial targets despite the influence of rising interest rates.
Switch to Interest Only
Consider paying interest only for a while. An interest-only loan requires only the interest portion of the loan to be paid each month.
The main goal is not to let your high mortgage payments put you under financial stress. While interest rates are high, does it matter if you pay interest only for a while if it lets you keep your home? Interest-only repayments on an average loan can reduce your monthly repayment by about $1,500 a month.
Flexibility: Interest-only loans can offer more flexibility than traditional loans, as you can make additional payments towards the principal to expedite loan repayment or pay only the interest if you need to save cash.
Borrow the Shortfall
Is using funds available in redraw funds or the equity in your current home to fund any shortfall in your budget an option?
Before considering this, you need to understand what capital growth your property has had each year on average.
This calculator will show you: SUCCESSFUL INVESTOR CALCULATOR
Consider a property valued at $800,000 that experiences a yearly capital growth of 6%. This would lead to doubling its value over the next 12 years, translating to an average increase of $66,000 annually. You might entertain the idea of borrowing against your home to offset your annual shortfall. Suppose you raised your loan by $10,000 annually for three years amidst high-interest rates. Factoring in the interest, your loan would increase by $32,000. However, this approach could mean the difference between keeping your home or not — is it an option you would entertain? The decision ultimately lies with you.
Become a Rentvestor
This might seem extreme, but it may be an option to consider if things are tough for you right now. Consider renting out your home and becoming a tenant yourself. When you rent out your home, all your expenses become tax-deductible — the interest, management fees, rates, insurance, maintenance costs, and more. You may find your financial situation dramatically improves if you become Rentvestors. Any good accountant can run these numbers to see how much (if at all) your cash flow improves if you take this option.
You may have read how hard it is to find a rental property in the current market but make a deal with a local real estate agent to lease your home through them if they find you a suitable rental property for yourself.
Property Investors
Do you have a tax variation in place if cash flow is tight? A tax variation will give you the tax deductions from your investment property in your pay packet instead of your tax return. Your accountant can do this for you.
Use our suite of calculators to run the numbers on the above scenarios to see if they will work for you: BHGRE HOME LOANS CALCULATORS
For a free home or investment loan assessment, contact our expert team.
Would you like more guidance on the concepts mentioned in this article? You can book a no-cost, nothing to buy obligation-free consultation over Google Meet with the author, Michael Sloan from Better Homes and Gardens Real Estate Melbourne Invest. There may be further strategies not mentioned here that can work for your situation. Contact Michael on 0417 577 597 or michael.sloan@bhgre.com.au
Disclaimer: The opinions posted within this blog are those of the writer and do not necessarily reflect the views of Better Homes and Gardens® Real Estate, others employed by Better Homes and Gardens® Real Estate or the organisations with which the network is affiliated. The author takes full responsibility for his opinions and does not hold Better Homes and Gardens® Real Estate or any third party responsible for anything in the posted content. The author freely admits that his views may not be the same as those of his colleagues, or third parties associated with the Better Homes and Gardens® Real Estate network.