"Carrots," I told my son the other night "are good for you. They make you grow big and strong." The statement was met with the briefest glimpse of excitement ("I get to grow big", and fair enough, he's only two) followed by a furrowed frown ("she actually wants me to eat that stuff").

It's pretty much the same reaction I have about rising interest rates. Fantastic, the economy is not imploding after all: on the back of three consecutive rate hikes we can be pretty sure that's what the Reserve Bank is thinking. But heck, that means I'm going to be pulling more out of my hip pocket to feed my hungry loan.

It's amazing how fast we adjust. Less than two years ago we were paying about 9 per cent and managing, or perhaps just scraping by. Now we've gotten pretty used to our lenders charging about 6.5 or 6.75 per cent. When the Reserve Bank board meets next Tuesday, February 2, it's tipped that there'll be another 25 basis point increase. That could be followed by yet another rise in March.

Of course, if you don't have a mortgage and you've stowed some of your investments in cash, you'll be rejoicing every rise that is coming our way - more earnings for you.

Why the increase?
A rise is being tipped thanks to a host of positive economic indicators, including falling unemployment (down to 5.5 per cent in December), consumers splurging at the shops and better-than-expected building approvals data. After an increase in December, the official cash rate is now 3.75 per cent. The global financial crisis isn't completely off the agenda overseas, but the Australian economy is certainly warming up.

What to do?
Little kids told to eat their vegies have the options of (a) throwing a tantrum (b) going on a hunger strike or (c) slyly feeding them to the dog. Mortgage holders don't really have any of those outs - dogs might munch up leftovers, but they're not so good with mortgage deeds. We just have to lump it, bitter taste and all. That doesn't mean you are powerless to act.

Quick fix
You can fix, either officially or unofficially. The downside of fixing officially is you'll be paying above the current variable rate offered by your institution. The upside is you'll be getting certainty in knowing what you'll be paying, for the time being. The alternative is the quasi-fix, where you pretend you've locked in your loan at a higher rate - as much as you can afford - and up your repayments to that level. You'll be slicing down your principal faster and fortifying yourself against future rises up to that level because you've already adjusted your budget to meet them.

Faster is better
Another option to bring down your principal faster and lessen the impact of rate rises is to pay fortnightly or weekly instead of monthly, if possible scheduling your repayments with your pay cycle so that the loan money is the first cash to leave your account. You should also dump lump-sum payments such as bonuses and tax returns into your account.

Offset
Using a home loan offset account will let your everyday cash work for you, offsetting your home-loan interest. This can help you pay off your loan sooner and save a wad of money in interest payments. Of course if you start to build up savings in that account that you don't need, you should transfer them to your home loan and hands off! Don't touch.

Flexibility is out
If you can, consider cancelling your redraw facility if you have one. Flexibility is handy, and lets you access cash when you need it. But being able to draw out extra money all the time makes it a little too enticing. Before you know it you owe as much as you did at the start, and will have to work harder and longer to pay it off. Of course, you'll need to look at whether there's any implications - does cancelling your redraw limit the amount of extra funds you can pay off your loan, that kind of thing.

Become a miser
Save where you can, cut back on your costs and put the money towards your loan.

Source: Domain.com.au

Posted by: Carolyn Boyd