Susan Edmunds is Stuff’s business editor. Each week, she will answer your money and personal finance questions. You can send yours to [email protected] This information is not intended to be personal financial advice and should not replace professional advice.
I’m really worried about rising interest rates. We bought a house almost a year ago and fixed our mortgage for one year. Is there a way to get a good deal now to avoid a big increase in our payments?
This is a situation that will become relatively common in the coming year.
A year ago, the one-year average standard rate was 3.24%. Specials were available even cheaper. In March of this year, it was 4.49%.
That’s a big dollar difference. If you had a $500,000 25-year mortgage, you would have paid $2,434 a month last year. Now it’s $2776. People who got a good deal last year would face an even bigger jump – they might have paid $2,243 a month if they got a 2.5% rate.
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If you’re worried, the first thing to do is talk to your bank or mortgage adviser to figure out what kind of payments you should expect.
You can then determine how you can adjust your budget to account for higher repayments.
I hear it’s not too easy to negotiate better rates at the moment.
But if you bought a year ago with less than 20% down and your home is now worth more, you may be able to negotiate to remove any low capital premium you’re being charged, or you may find that you are now eligible for better special rates.
You can ask a broker to tell you if there is a better deal from another lender. (That comes with the caveat that the rates are usually all pretty similar, and a bank that’s the cheapest right now might not be the next time you come in to fix it.)
Many things borrowers are often told to consider to make a loan more affordable won’t really work for you. Extending the term to reduce payments won’t help much because you’re probably already close to the maximum possible term. Likewise, opting for “interest only” payments may not be very helpful because when you start paying off a mortgage, a very small portion of your repayment is principal.
Probably the best thing to do is to rethink your spending so you can get through this period. When you applied for your loan, you were probably stress tested at a higher rate than you’ll have to pay, so while it might not be the most comfortable experience, the bank thinks that you can do it.
If there is something you can do to increase your income, that might also help.
Get advice on the right rate to set when settling on a new term. Interest rates may not rise much more, so locking in a long-term loan could prove costly. But you will know how much you are willing to pay for certainty.
Another option is to split your loan into smaller chunks so that the next time part of it is written off, you won’t be as exposed to interest rate movement.