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What are my options with interest rates rising?

With interest rates hitting 6%, many home buyers who took out their loans a year or so ago, may be looking at their mortgage repayments doubling when they come to refix. For many this can be a large jump in monthly repayments, depending on the amount borrowed.

So how can people navigate around this? Generally, last year, banks were still stress testing borrowers at around 6%. This means in order to be granted a loan, borrowers had to prove they could continue to repay their loan at a 6% rate, even though they might have only been paying 2.5% at the time.

For most people, if they could pass this “stress test” then in theory they should still be able to pay their mortgage back at the current higher rate. However they may find they need to cut back on unnecessary spending, or work a little harder to manage their expenses.

Where borrowers could run into trouble, is if their circumstances have changed since they took out their loan. For example they changed jobs for lower pay, went on maternity leave, or were made redundant. Additional spending in this time; for example drawing down on a car loan, or topping up their loan for house renovations, could also cause issues with ability to repay.

For those really struggling to pay their mortgage at the higher rates, there is always the option of moving to interest-only repayments. This is where payments are only made on the interest amount, rather than also paying the principal amount. While this isn’t favoured by the banks, if you can meet their criteria it is an option for those really struggling to pay. Typically, most banks only allow interest-only repayments for around two years, however for some borrowers this may be enough to ride the current wave of inflation and change. It’s important to know this is assessed on a case by case basis, and generally only if you can prove you are financially struggling.

If it’s time to re-fix your loan, or you are concerned about managing your repayments once your rate increases, then get in touch with us. We can help you create a plan to manage repayments or look at alternative repayment options such as interest-only, if your circumstances have dramatically changed.

Contact the Better Choice team today.



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