Strategy for Floating Rate Mortgages
For many years the only type of home loan available was a floating rate mortgage. It was easy to understand and simple to implement for the lender. However it was not so easy for the borrower.
The reason is that home buyer did not know how much they were going to have to pay each month. If interest rates rose, then their monthly repayments went up too. The reverse was true too in that if rates went down then monthly repayments decreased too. However, the problem is when rates rise, especially if they rise a lot. In the 1980s some people might remember how interest rates went from five percent up to 15%. That is a massive increase which can cause severe hardship to many borrowers.
Floating Rate Mortgages
Getting into floating rate mortgages can be a little risky for some home owners. When you take out the mortgage, at that stage the interest rate is competitive and affordable. But before you commit to the loan, you need to consider choices on how you will be able to avoid getting trapped with high interest rates and high monthly mortgage payments if rates arise.
During the past few years, interest rates have unquestionably been at historical low levels. As a result, a lot of people have taken out huge mortgages which seem affordable now. These low rates have been one of the reasons for the rapid increase in house prices as people could afford to pay more for a house they particularly wanted. However, we are seeing rates start to edge up again so there could be some nasty shock coming for people who have over-stretched themselves. Some economists are forecasting high inflation rates in the coming years.
Avoiding Rising Rates
There are a number of ways in which people can avoid increasing rates of interest on floating rate mortgages.
The first strategy is to ask your mortgage provider if you can switch to a fixed rate loan. A fixed rate gives a degree of certainty over the life of that fixed rate.
The second is to take advantage of the current low repayments and save a proportion of your income as a reserve to use when you rate increases. This requires discipline to save and unfortunately, many people these days do not have a good saving habit.
The next idea, which again requires good financial management, is that if rates do drop, and then keep your payments at the previous level. This means that your capital will be repaid a bit faster so your overall interest paid will decrease.
Another, perhaps more drastic option, is to down-size your home and hopefully your mortgage.
A final idea is to make a lump-sum payment off the loan so that your interest figure will be reduced.
Conclusion of floating rate mortgages
It seems highly likely that interest rates are going to increase in the short-term, whether you do like it or not. No-one knows how high they will go so you need to be prepared for handling the higher mortgage repayments.
Before you sign up to a floating rate mortgage, talk to a mortgage broker who will be able to show you some different repayment options. This might sound a bit extreme but it is better to have an understanding of how you might be affected now before you face tight payments in the coming years.
Your property may be repossessed if you do not keep up repayments on a mortgage or any other debt secured on it.
Types of mortgage
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