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Rates have been at record lows for some time, but for some borrowers their luck may soon run out.

Westpac increased its rates for all mortgage holders on Wednesday with other major banks expected to follow, and mortgage holders may find themselves with mortgages that cost more than expected.

The Westpac increase of 0.2 percentage points for all variable rate holders, including owner occupier variable rates now headlining at 5.68 per cent, came out of the blue for mortgage holders, while smaller lenders are still cutting rates.

While the market may be increasingly unpredictable and preparation is key, there are some things mortgage holders can do to ready themselves when rates rise.

Budget

While easier said than done, mortgage holders would be well placed to go over their budgets and know exactly where they can trim the fat should circumstances require it.

Having a clear budget breakdown means that if you do start struggling, you’ll know exactly where you can cut back and how much you can cut back by. ASIC’s Money Smart has a mortgage calculator that allows you to easily work out your repayments in several ‘what if’ scenarios, which can provide an estimate of how much extra cash you might need.

Those whose rates haven’t been increased can prepare now by reining in spending and saving the extra dollars for any emergencies.

Insurances

Increasing rates mean that your mortgage will chew up even more than your income – and it might be time to consider income protection and other insurances. Make sure you’re covered in the event of sickness, injury or even redundancy so that you don’t lose your property.

While sometimes this can cost a little extra, it will provide you peace of mind and a safety net for when situations really do get serious. Speak to a financial planner first about what you can do to protect yourself.

Put down a lump sum

If you have savings, inheritance or other funds available, now might be the time to use them to provide a buffer in your mortgage or getting rid of other ‘bad debts’ early.

The sooner you can make a lump-sum repayment on your loan, the less interest you will pay on your mortgage in the long run – while monthly repayments will reduce for some borrowers, others may not, depending on their specific loan. Speak to your lender about any ramifications of putting down a lump sum and seek advice first.

Refinance

If your mortgage gets unmanageable it may just be time to look and see whether you could be getting a better deal elsewhere. While Westpac is hiking rates, you may want to consider smaller second-tier lenders who may not be putting up their rates. Some of them may even be dropping what they’re charging, with many announcing significant cuts in recent weeks.

Seek advice from a broker, consider any break or penalty fees from your current loan and consider a cheaper mortgage. While you refinance, you can also consider fixed-rate loans that may make your repayments more predictable and easier to manage. Fixed-rate loans can be more expensive than variable rates, but they do give you the luxury of planning ahead.

Loan features

There are many extra bells and whistles that can be added to your home loan – however, many of these can come with a cost attached.

Firstly, consider whether you use the features that are available to you under your current mortgage arrangement. If you’re not and there isn’t a reason you would, find out whether your loan product is costing you more as a result.

Secondly, look at what features may be useful in helping your situation. An offset account with a redraw is a popular way to use extra money you have to lower your repayments. As interest is calculated daily on some of these features, having your salary deposited into the redraw account by your employer and then withdrawing as you need can help lower the cost. You can also keep your extra savings in the redraw so it is being useful in the long term.

NAB’s banking tips suggest that the difference between $10,000 in an everyday banking account for the life of a loan could be more than $45,000 – though this varies with interest rates. Their guide indicates that every dollar kept in the redraw for longer makes a difference – so using interest-free days on cards instead of pulling the money out of the redraw can be beneficial. An offset requires discipline, as the funds are relatively easy to access, and straightforward extra repayments may be more prudent for some borrowers. Mortgage holders should obtain advice first.

Plan ahead

The most critical technique is to plan now – particularly if you think rate rises are on the horizon. Create a habit of repaying more than the minimum and know what a rate rise would cost you and how you might afford it.

Speak to the experts, including your broker, lender, accountant and financial planner, before making any significant decisions.

If facing hardship, arrears and other problems then get in touch with your lender straightaway and attempt to call them ahead of being in this situation – they may be able to advise on your options.


Posted by Jennifer Duke – Domain (Fairfax) on 20th October, 2015