7 Tips to Prepare for Mortgage Interest Rate Increases

Mortgage Interest Rate

Almost the entire world has been operating in a low-interest rate environment for several years now and we are finally starting to see interest rates rise.

That’s good news if you are saving or investing, but it can be a concern if you are a borrower, particularly if you have a mortgage.

Interest rates and real estate have always had a close relationship.

When interest rates are low, borrowers can pay off more of the principal of their mortgage with each payment and can therefore afford to borrow more. This can lead to increases in real estate.

When interest rates start rising as they are now, borrowers will see more off each of their mortgage payments going towards interest payments and the principal on their real estate will be reduced more slowly. This can lead to real estate prices falling.

Perhaps the worst position you can be in is to commit all your available income to your mortgage payments when interest rates are low.

This is because when interest rates rise, you have no surplus income to meet the higher repayment rates required.

To ensure you are prepared for any potential mortgage interest rate increases, here are 7 tips that you should look into immediately, including if you are just about to purchase a home.

1. Make sure you know what kind of mortgage you have

If you have a mortgage with a fixed rate for a fixed term, then interest rate increases won’t immediately affect you. But when your fixed term ends, you could face a significant increase in your mortgage repayments. You’ll also need to decide again if you want to fix at the higher rate or change to a flexible interest rate.

If you’re on a flexible interest rate, then every interest rate increase is likely to affect you and your mortgage repayments will increase with each interest rate increase.

2. Work out what effect an interest rate increase will have on you

Your lender should be able to help you with this. They will probably have an online mortgage calculator that will allow you to input different interest rates to see how much your mortgage repayments might increase.

3. Work out what you can afford

Time to go through all your income and expenses and create a budget. If there is an interest rate that will increase your payments to more than you can afford then you need to go back to your budget and see what expenses you can live without, or consider how you could increase your income, e.g., working overtime, get a higher paying job, or find a second job.

4. What if you think you can’t afford higher mortgage repayments?

Ask for help.

Talk to a budget adviser for help reducing expenses or paying off other debts

Also, talk to your lender. You might be able to extend the total term of your mortgage. This will make your regular repayments much lower and affordable now. But it does mean more years in mortgage debt and the long-term will mean your total payments will be far higher.

If you have other debts, you could consolidate your debts into your mortgage which will be a lower interest rate than your other debts and be paid off over a longer term. While this will increase your mortgage repayment amount further, you will no longer be repaying the other debts. This will usually create the surplus income you can put into your mortgage.

5. Build up your credit score

If your credit score improves, you are in a better position to negotiate with your lender, or with another lender.

6. Shop around and make sure you’re on the best deal

Too often borrowers go to their bank to get their mortgage when other banks and lenders will have better offers which could save you tens of thousands of dollars over the full term of your mortgage.

Even if you made sure you got the best possible deal when you first got your mortgage, it may not be the best deal now.

Switching lenders will carry some costs, particularly if you are breaking a fixed interest rate term, so only do this if you can see a significant saving that either make your mortgage repayments affordable now, or that will save you significant money over the full term of the mortgage.

7. Overpay your mortgage

If you have surplus income now and interest rate rises won’t affect you until they rise higher, then put that extra money to use by increasing your current mortgage repayments. This will allow you to reduce your mortgage principal faster.

When interest rate increases start to bite, you will have a smaller mortgage amount to repay, and the interest rate increase won’t have such a significant impact.