The matter may no longer be if interest rates rise, but when, so here are 3 ways you can prepare for rising interest rates.
1. Pay down your debt
Easier said than done, but it makes sense that the less debt you have when interest rates go up, the less you'll be effected. Because interest rates are currently so low now is one of the easiest times to pay down as much debt as possible. In the future you don’t want to reflect on the time we had 4% interest rates and regret that you didn’t attack your home loan.
2. Don't settle for the 'default' mortgage structure
Your monthly income and outgoing expenses are very different to the next guy, so why should you be lumped with the same 30 year term home loan as everyone else? You should structure your loan to suit you, not your mortgage provider. Make sure your loan is set-up so you are reducing your remaining home loan term.
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3. Consider if you should 'fix' or 'float' your current rates
Whether you should have fixed or floating interest rates is entirely dependent on your situation and no one should tell you which you should do unless they have an understanding of your specific circumstances.
The advantages of floating is that you can pay off more principle to reduce your overall interest costs and you can structure your loan around this to pay down your debt faster. The disadvantage of floating is you don't get the certainty around the rate.
On the other hand fixed rates give you certainty because you know how much you'll be paying for the fixed-term. The downside is that you'll have limited ability to pay down your mortgage as much as you can throughout that term so your financial position may not improve much.
One tactic may be using a combination of both fixed and floating rates to reduce a portion of your home loan faster while still having certainty around the other portion. This is where a robust loan structure comes in to play.
Is there anything we've missed? Let us know if you have any tips on preparing for interest rate rises in the comments below.
The information contained in this article is of a general nature and should not be taken as advice. It reflects the opinions of the writer only and does not necessarily reflect the opinions of New Zealand Home Loans.
