How to ease mortgage pain amid rapidly rising interest rates
A finance expert has urged home loan borrowers to take urgent action to cut costs as mortgage stress rises at alarming levels.
Households are facing the threat of super-sized successive rate hikes over the coming months, with one of Australia’s Big Four banks forecasting the cash rate could hit 3.35 per cent by November.
The dire prediction from ANZ comes after the Reserve Bank of Australia (RBA) lifted the cash rate to 1.35 per cent earlier this month - its third consecutive increase of the year.
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It means borrowers with a modest $500,000 loan could be scrambling to find an extra $968 per month and those with a $1 million loan would need to fork out as much as $1,938, according to financial comparison website Canstar.
The other big banks are predicting a cash rate of 2.60 per cent between November 2022 and February 2023, painting a bleak picture for households already struggling to cope with mounting cost-of-living pressures.
Canstar finance expert Steve Mickenbecker said homeowners needed to start cutting costs now to prepare for the higher repayments, suggesting they start with a little research and paperwork.
“Rising interest rates should put a lower-cost home loan at the top of every borrower’s shopping list,” Mickenbecker said.
“Interest rates are already up by 1.25 per cent this year, with another 0.50 per cent rate rise expected in August. Refinancing with 20 per cent equity from an average variable interest rate of 3.85 per cent to the lowest variable rate available now effectively means immunity from the next 1.31 per cent of the rate rises.”
Optimise your offset account
Mickenbecker warned any money sitting in your savings account could be put to better use in your offset account attached to your home loan.
An offset account is a transaction account that is linked to your home loan.
The account’s balance (or a proportion of that balance) is ‘offset’ daily against your home loan balance.
This means you’re only charged interest on the difference between the total loan balance and the amount offset.
For example, if you have $10,000 sitting in an offset account linked to your home loan, based on the average variable rate of 3.69 per cent, you could be shaving almost $400 off your interest bill in the first year, or close to $2,000 if you had a larger deposit of $50,000.
He said the savings here outweighed the interest you could earn by having the same amounts deposited into the highest-interest-rate savings account in the market today.
Switch to a no-frills loan
Aussie mortgage holders are also being encouraged to consider switching to a basic cheap home loan.
However, while it could cut the costs of regular repayments, it may also mean doing away with some features in exchange for the savings.
Mickenbecker explained package loans typically came with benefits such as access to fee waivers for a transaction account, an offset account, credit card with the annual fee waived, discounts on insurance and discounted or free financial-planning sessions.
But in return for packaging all the products together, the lender typically charges an annual fee of around $400.
In some circumstances, he recommended opting for the basic loan if you were unlikely to use all of the extras.
Canstar’s data suggested this move could initially cut your interest rate by 1.36 per cent and shave $397 off your monthly repayments, not to mention saving money on the average annual package loan fee.
Negotiate like a new customer
Mickenbecker said existing borrowers often paid a higher rate than what was offered to new customers with the same lender.
He urged mortgage holders to use this as a negotiation tool with their current lenders to make the switch to a new one who lowered your interest rate.
Canstar’s analysis shows borrowers taking out a new loan in May were securing a 0.46 per cent discount compared to existing borrowers, who were left forking out $123 more in monthly repayments and $44,000 more in interest over the life of the loan.
Steer clear of interest-only
An interest-only payment is where you only repay the interest on the amount you have borrowed for a set period of time.
Mickenbecker said that while it meant lower minimum monthly repayments, you would end up paying more in interest over the life of the loan compared to principal-and-interest loans.
He also warned borrowers could be up for larger repayment shock at the end of the interest-only period.
Seek help if you need it
Many families are already struggling to make ends meet amid mounting cost-of-living pressures.
Mickenbecker urged those whose bills and loan repayments exceeded their income to ask their lender for a financial-hardship arrangement before taking on additional debt.
He said this was an opportunity to negotiate an agreement with your lender to defer or reduce repayments, restructure loans, change repayments to interest only for a set period of time, or waive fees and charges.
There is also free financial counselling available in Australia.
The National Debt Helpline (NDH) can be contacted on 1800 007 007.
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