Interest rates go up and down. When rates are low, it’s easy to assume they’ll stay low forever. But it was only about 20 years ago that interest rates were at 17% pa. So it’s worth thinking about how even a small increase will affect your lifestyle.
Is it better to play catch-up?
If interest rates go up and you’re only making the minimum repayments on your loan, you’ll need to start paying more. If rates increase just 1% pa you’ll pay an extra $190 a month on an average home loan of $300,000 payable over 30 years.
You’ll have to find this money somewhere, which may mean cutting back in other parts of your life.
With a small rate increase it could be as simple as packing a lunch every day rather than eating out. But a more drastic rate rise could mean cancelling the footy membership or even scaling back on this year’s overseas trip.
Or get on the front foot?
There are ways to protect yourself against interest rate rises. If you plan and pay a little more today, you could give yourself some breathing space if rates go up.
Say you have a loan of $300,000 payable over 30 years and the minimum repayment is $1,647 a month at a yearly interest rate of 5.20% pa. You decide to increase your repayments to $2,000 a month. Rates could rise 1.8% pa (to 7% pa) before you’d need to start paying more.
A little extra today can protect against future pain. By increasing your repayments to more than the minimum, you’re helping to pay off your home loan more quickly and effectively insuring yourself against future rate rises.
Important informationShow more
It’s important to consider your particular circumstances and read the relevant Product Disclosure Statement or Terms and Conditions before deciding what’s right for you. This information hasn’t taken your circumstances into account.
This information is provided by AMP Life Limited. Read our Financial Services Guide for information about our services, including the fees and other benefits that AMP companies and their representatives may receive in relation to products and services provided to you. All information on this website is subject to change without notice.