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RBA rate rise: What to do if you are facing mortgage stress

·4-min read
Money in wallet and houses in Perth
The Reserve Bank of Australia (RBA) hiked the cash rate for the first time in 12 years last month. (Source: Getty)

Aussie mortgage holders are set to be paying hundreds extra per month as the Reserve Bank (RBA) raises rates by 0.50 percentage points, taking the cash rate to 0.85 per cent.

For many Australians who have a mortgage, this price hike adds extra financial stress as their repayments will rise along with the soaring cost-of-living, with wage growth remaining sluggish.

In fact, if the banks pass on this rate in full, RateCity data shows the average borrower with a $500,000 debt and 25 years remaining will see their repayments rise by $133 a month, or $197 in total if counting both the May and June hikes.

The good news, however, is that there are some steps homeowners can take right now to help ease the squeeze on repayments. Finder money expert Sarah Megginson said there are a couple of quick actions many Aussies can take immediately.

The first step is to compare your current interest rate to what’s on offer in the market.

Megginson said rates varied substantially between lenders, with the difference between the lowest variable rate and the highest variable rate about 1 per cent at the moment.

From there, Megginson recommended asking your current lender for a better deal.

“I once got a 0.2 per cent reduction instantly by calling up,” she said.

If that doesn’t work, she recommended checking comparison sites to find a better deal.

“It really doesn't take that long, but it can feel like an intimidating and time-consuming process,” she said.

RateCity research director Sally Tindall said many people thought a rising interest rate environment was a bad time to be renegotiating with their bank or shopping around for a better deal.

lowest loans
lowest loans

“But in many cases, that’s just not true,” Tindall said.

“Banks still need to keep new business rolling through the door, and they’re typically doing it by offering sharper discounts to refinancers willing to switch lenders.”

Refinancing tips

When it comes to refinancing, Megginson said there were a few things to consider.

For mortgage holders that have been paying down their loan for a few years, Megginson said having a bigger bucket of equity is useful.

Having extra equity in the home may mean you no longer have to pay lenders mortgage insurance, which is a one-off premium added to your loan designed to protect the bank if you are unable to repay your loan.

A smaller debt balance also meant lower repayments, she said. However, if you choose to take out another 30-year loan, that may mean you end up paying for the loan a bit longer unless you make extra repayments.

Megginson also urged refinancers to look out for incentives such as cashback offers that banks and lenders used to sweeten the deal and make the move.

Some cashback offers can be as much as two or three thousand dollars which can be used to pay for the discharge fees on the former loan as well as being put towards paying down the loan.

Choosing between a fixed rate and a variable rate is another point to consider.

While you are probably going to be paying 4 per cent or more for a fixed-rate loan, she said people may be willing to take on this higher rate in exchange for security.

I’m still struggling to meet my repayments. Now what?

Catherine Mapusua, head of lending at WLTH, said people should do a rigorous review of their income, expenses, debt, savings and investments.

“Ask yourself: ‘Are there any changes I could make to reduce my expenses?’” Mapusua said.

For people really concerned about their financial situation, she said it was important to contact your lender as soon as possible.

“They’ll be able to help you find a solution that is right for your personal situation,” she said.

This could mean temporarily pausing or reducing payments, or extending the terms of your home loan in order to minimise your monthly repayments.

Mapusua said people in dire financial circumstances should consider selling their property.

“While this is a tough decision to make, it's better to sell your home yourself than have a lender take possession and sell it,” she said.

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