5 loan strategies to consider during higher interest rate periods

When interest rates are high, the mindset you have toward your loan should be different to when interest rates are lower.

Being able to make your ongoing repayments when rates are high is an achievement in itself.

When rates reduce, the goal should be to maintain these higher repayments to build a buffer.

Here are 5 loan strategies to consider in the current interest rate environment:

Move savings from your bank account into your offset/redraw account:

●     There are some attractive savings rates at the moment (some 5%+) these are generally only for an introductory period.

●     For most of you, the interest rate of your mortgage will be higher than the savings rates on these cash accounts.

●     With many banks, you will be able to have more than one offset account. This would allow you to have different accounts for the goals you are working towards.

Offset the correct loans:

●     If you have both a mortgage on your home and investment property, there are tax advantages to having higher interest costs on your investment loan as compared to the interest on your family home (which is not tax-deductible).

●     Make sure that any money in your offset account is sitting against the correct loan to maximise these tax advantages.

Review your rate (at least every 6 months):

●     This may seem obvious. If you are not regularly reviewing your loan, there are several things you could be missing out on:

○     Is your current rate still competitive? Even negotiating with your current bank could reduce your ongoing repayments – talk to us for current rates + call script when speaking with your current bank

○     All of the banks are offering discounted rates for new customers. There is a “loyalty tax” for staying with your current bank long term and it has very much become about playing the game and being prepared to re-finance to get the best outcome.

○     Are there any current offers that would be beneficial - many banks are offering cash incentives to refinance with them to attract new customers (some up to $4k).

Review your loan - equity release (every 12 months):

○     Has the value of your property changed increased? This could mean you could cashout some extra funds to provide a buffer during this period of higher interest rates

○     Using this strategy can increase your access to funds by borrowing up to 80% of the value of your property to keep these funds as a buffer or for further investment (property or shares).

○     This is not the strategy if you have “sticky fingers” ie you spend these additional funds on personal items

Review your loan - extend the loan term:

○     If you are looking to reduce your ongoing loan costs, extending your loan term is something to consider.

○     By extending your loan term, your minimum loan repayment will be reduced offsetting some of the additional interest costs incurred with the higher rates.

○     Extending your loan term will provide relief from some of the interest increases but will mean your loan will be in place longer

○     This can be reviewed as rates change and you can make additional repayments.

In conclusion, higher interest rates require a different approach to managing your loan compared to lower interest rate environments.

By implementing the loan strategies outlined in this article, you can minimize your interest costs, maximize your savings, and build a buffer against any future interest rate increases.

Remember to regularly review your loan, keep an eye on interest rates, and take advantage of any offers from banks to ensure that you are getting the best possible outcome for your situation.

By being proactive and strategic, you can successfully manage your loan during times of higher interest rates.

Feel free to get in touch if you want to discuss this further.

Source: Craig Bigelow – Wealthful Mortgage Brokers