How to minimise the impact of rising rates

Stick to your budget

It's time to get serious about budgeting. While it can be difficult to give up little luxuries such as a daily takeaway coffee or restaurant dinners, even small efforts can make a difference to your savings. Make a list of all your unnecessary spending, and decide what you can cut back on, or even give up altogether. Put any savings directly into your home loan or offset account to help reduce the impact of rising interest rates.

Consider fixing or splitting your loan

If you are concerned about the impact of higher interest rates on your home loan repayments you may wish to consider switching to a fixed rate home loan. With a fixed rate home loan, your repayments stay the same for the duration of the fixed term, usually between one and three years.

Alternatively you can split your loan. Also known as a combination loan, a split loan allows you to fix part of your loan, while the other part remains at a variable rate loan. If interest rates rise, you have the security of knowing that part of your loan is fixed for a pre-determined period. Alternatively, if interest rates fall, the variable component of your loan attracts lower rates.

Go for a basic loan

Home loans with more features attached generally have higher interest rates. If you find you are not using the extra features in your current loan, consider switching to a no-frills or basic home loan at lower interest rates and with lower or no fees. Be careful as some basic home loans limit extra repayments and redrawing.

Get a head start on your home loan repayments

Getting ahead on your home loan repayments can help reduce the amount of interest you pay over the life of the loan. Deposit any "extra" or unexpected income such as a work bonus, tax return or dividend payment directly into your home loan account. These extra repayments go directly towards reducing the loan principal, helping you pay off your home loan sooner and potentially reducing the overall cost of the loan.

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Related links

• Reserve acts on inflation - How will this affect you?
• Get financially fit - Edition 26 Summer 2007
• Is it time to refinance? - Edition 26 Summer 2007
• Fixed or variable interest rate home loan - which is best? - Edition 11 Spring/Summer 2004