Six ways borrowers can beat rising interest rates

With inflation remaining high, interest rates are likely to stay at elevated levels for some time.

For borrowers, this means they are going to face higher mortgage repayments for the foreseeable future. Thankfully, there are some simple actions that can be taken to help ease the pressure.

Use an offset account

Most mortgages come with an attached offset account, which is a powerful tool to reduce your interest expenses. An offset account allows you to park your extra cash or savings, and then the mortgage’s interest charged is calculated based on your loan minus the balance in your offset account. For example, if you have a $500,000 loan and $100,000 in your offset account, you're only charged interest on $400,000. The higher your offset balance, the lower your interest costs, which means you can pay off your loan quicker. To maximise savings, you can get wages paid directly to your offset account. Daily interest calculations mean that every dollar counts in reducing your overall interest expense.

Consider multiple offsets

While pooling all your surplus cash into a single offset account can be beneficial, some people prefer separating their savings into categories like a holiday fund, pet fund, car fund, and so on. Fortunately, some lenders offer the option of having multiple offset accounts, allowing you to reduce your payable interest with every dollar saved in these accounts. This way, you can maintain budgeting flexibility while still reducing your mortgage interest.

Use redraw to park savings

When you have a healthy offset balance, it's easy to become comfortable and indulge in extra spending. To stay on track and motivated, set an offset balance target, such as $50,000, $100,000, or any amount that suits your goals. If your balance exceeds this target, consider transferring the excess into the redraw facility, effectively paying it directly into your loan account. These funds are available in emergencies but are otherwise locked away, ensuring that you save on interest costs.

Leverage your credit card

Many loans come with both an offset account and an attached credit card, often without fees. If you have good budgeting skills and discipline, you can use the credit card for your monthly living expenses and pay it in full at the end of each month. This strategy keeps your money in the offset account for as long as possible while avoiding interest on the credit card. Automating full payment of the credit card at the end of the month can further streamline this process and help you track your monthly expenses effectively.

Pay yourself first

For those who find it challenging to manage their budget or track their expenses, a useful tip is to transfer a fixed amount to yourself for weekly or monthly spending. This approach gives you greater control over your outgoings and helps you identify any reckless spending as it happens. By sticking to a budget, you can stay on top of your finances and minimise unnecessary expenses.

Regularly review your home loan rate

Lastly, don't forget to review your home loan rate regularly. Interest rates fluctuate, and your lender may offer new deals or rates that could save you money. A simple rate comparison by your mortgage broker can help you identify opportunities to refinance or negotiate a better deal with your current lender.