This article first appeared in July 2022 Hills District Independent and Blacktown District Independent magazines
We are being bombarded with the fact that interest rates are on the rise and we are surrounded with financial doom and gloom but it’s not as bad as you think. Let’s go back a few steps and look at where we really are.
Yes, rates are rising, this was inevitable. They cannot stay at all-time lows forever. So, what does this mean for you and your mortgage?
When you got the loan from your bank you needed to qualify with them to be approved, which means you met their criteria for the loan. One of these criteria is SERVICABILITY which means your bank uses your income and liabilities along with your personal budget to determine if you can repay the loan.
Interest rates form part of the formula in the bank’s serviceability calculators. They know how the rates work. Rates go up and down over time depending on factors within our economy. Instead of using the rate you receive on your loan, the bank builds a buffer into the borrower’s rate for servicing purposes only, to ensure that in future you can afford the loan you are applying for. The buffer can be up to 3% above your loan’s rate and is not passed onto the borrower. So you see the bank will not lend you money you cannot afford.
If your financial situation is the same as when you settled your loan, then you should still be in a position to pay your mortgage each month.
The interest on your loan is compounding. That means you pay interest on interest. The question you need to answer is, do you want a low rate? Or do you want to pay less dollars?
Most people want to pay less dollars. To do this, you need to increase the frequency of payments on your loan. There’s no need to pay more. Unless you want to!
If you have any questions about your current situation, Ask Ang.