Robbing Peter to pay Paul less A mere 0.25 of a percentage point increase in rates equates to just one bottle of reasonable wine per month, or $17, for every $100,000 outstanding on a home loan. Thats good news, perhaps, for sensible borrowers, but could force the debt-challenged to rethink their mortgage.

Housing affordability is at one of its lowest points in a decade and even though the buoyant economy is likely to limit mortgage defaults, some household budgets are as stretched as when interest rates rose above 17 per cent in the early 1990s. Rates may be less than triple the amount it was then.

In June 1989, when mortgage rates reached 17 per cent, monthly repayments on the average $66,700 new home loan were $959 or 25.8 per cent of household disposable income. After Wednesdays increase, repayments on the current average loan of $222,200 account for 28.2 per cent of disposable income, according to CommSec chief equities economist Craig James.

There are few ways to ease the strain other than refinancing to a cheaper loan, Moving lenders incurs fees, sometimes high ones, but the eventual cost savings can ease cash flow problems or create surplus cash for extra loan repayments. The latter is a useful strategy as it reduces the principal amount owing on a loan, thus cutting the dollar value of monthly interest charges. Its a commonsense tactic, equally relevant to credit cards, and other loans, but one often forgotten in an era of easy debt.

'We see people in their 40s with high debt but no repayment schedule. The modern view is that debt is like an ATM... For new cars or world trips.' Says Robert Keavney from financial advisory firm Centric Wealth.

'Its usually not recognized until people see retirement on the horizon and think: I havent saved what I need and what Ive got needs to pay off the house,'Keavney says.

Fixed rate loans are an option for people with no surplus cash to cover further rate rises. But if rates do not rise again, or even fall as predicted by AMP Capital Investors chief economist Shane Oliver, borrowers could be locked into a loan that is no longer good value.

Cheap variable mortgages offer rates that are up to 1.1 percentage points lower than the 7.82 percent standard variable rate that is likely to be charged by major banks following Wednesdays rate rise. Infochoice, an independent research house, reckons the cheapest lenders include the Electronic Loan Company, Sapphire Mortgage Services and one direct, a new offshoot of ANZ. HomePath, another cheap lender, is part of Commonwealth Bank.

Some cheap loans have much the same features as more expensive products, such as the ability to make and then redraw extra repayments. Sometimes these loans have restrictions, such as a limit on redraw, but these could prove a minor inconvenience compared with the interest saved as a result of the lower rate.

Someone who borrows $250,000 at a rate of 7 per cent, for instance, will pay $39,863 less interest over 25 years than someone who chooses a loan with a 7.82 per cent rate.

Opting for a cheap credit card (there are plenty about) should have a similar effect. Three institutions - BankWest, Newcastle Permanent Building society and St.George - have credit cards with interest rates of about 9 per cent. Others, such as virgin, Charge slightly higher interest rates but dont charge an annual fee.