Property pain: Why 2023 could be even tougher for homeowners
The RBA is not done with its interest rate hikes.
It’s been a remarkable year for the Australian property market - one that has taken a heavy financial toll on homeowners.
In December 2021, the average house price in Sydney had just started to fall from an all-time high in November to $1,375,000 (Core Logic). The average interest rate being paid by borrowers was 3.45 per cent (according to the RBA). The monthly repayment for an 80 per cent loan for the average house at this rate was around $4,900.
In May the Reserve Bank (RBA) began the most unprecedented series of cash-rate increases in Australian history, hiking the rate eight times during the year. By October (our most recent property data), the cash-rate increase had pushed the average mortgage interest rate up to 5.95 per cent.
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Anyone who purchased a home in December 2021 would now face repayments of around $6,550 per month - an increase of over $19,800 per year. The two cash-rate increases since October, if fully applied, would increase that payment again to $6,900 per month today.
A $2,000-per-month increase is a huge cost for any borrower to bear. However, there are some effective tactics that mortgage holders can utilise to mitigate the impact of these increased costs.
The most effective method that mortgage holders can use to weather the interest rate hike is refinancing. While the average discounted mortgage rate is currently sitting somewhere around 6.5 per cent, the lowest rates in the market are currently about 2 per cent lower. Jumping from the average rate to 4.5 per cent would save more than $1,300 per month in interest.
Borrowers should also consider splitting their debt into fixed and variable components. Generally, the tactic here is to fix a higher portion of your loan and leave a smaller portion on a variable rate. While fixed rates are usually slightly higher, this type of loan protects you against future cash-rate increases (more on that later) and provides more predictability to your repayments.
Meanwhile, most banks will allow you to open an offset account against the variable portion of your loan. This means that any savings you accumulate will offset the interest owed, and reduce your repayments. This method can be very effective - I’m currently paying no interest at all on the variable portions of my home loan because it is fully offset with savings.
Finally, borrowers who have the ability should consider making extra repayments. As an example, paying an extra $200 per month would save more than $130,000 in interest over the full term of a 6.5 per cent loan on the aforementioned home. It would also reduce repayment time by more than two years.
It's worth noting the RBA’s December rate hike is unlikely to be the last. Finder’s panel of economists are expecting the cash rate to continue to rise until it hits 4 per cent - meaning several more rate hikes are likely in 2023.
This is why it’s important to act now - taking a little time over the holiday period to attempt to reduce your interest rate could save you thousands over the coming months, and it might be the best new year’s resolution you can make.
Graham Cooke is the Head of Consumer Research at Finder. A seasoned data journalist, he runs Finder's global consumer research team and Insights column. Graham regularly appears on Australian TV discussing personal finance, and has written for several publications including Money Magazine and Nasdaq.
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