As rates rise, many homeowners are facing the prospect of paying more than 2.5% higher on their mortgage than what might have been only a matter of 6 months ago.
In terms of how this translates to mortgage repayments, it’s a nearly $1k per month increase on an $800k loan over a 30-year loan term. Whilst investors can absorb some of this increase by way of rental increases and additional tax offsets, owner-occupiers are simply having to bear the cost and find the extra funds for the higher repayments.
Fortunately, there are many Australians who have been able to get an increase in their wages or stockpile savings with the massive cash handout from the government during COVID, although there are still some who are left with increased costs and no way to cover them.
Interest rate increases do appear to be slowing, but for some, the damage is done, although there are a few ways to reduce your repayments and give yourself a little bit of breathing space.
- Refinance to a lower rate
This option is the most common and cost-effective, and some lenders are still offering large cash incentives to entice would-be refinances, some as high as $5,000. That’s a full month of mortgage repayments for the average Australian, and getting a lower rate will also reduce the repayments overall. Just make sure that when you’re comparing rates, the lender you’re looking at has already factored in the latest rate rise in their offer (we already do this on your behalf)
- Refinance over a 30-year term
If you’re considering doing this, it’s extremely important you’re aware of the extra interest costs associated with doing so. An $800k mortgage over 25 years would attract repayments of close to $4,400 per month based on a rate of 4.39%, whereas the same loan over a 30-year term would be around $4,000 per month, a $400 per month reduction. Conversely, the total interest payable over 25 years would be around $519k, compared to a 30-year term of $640k. We’d recommend you treat this as a short-term solution and try to make additional repayments as soon as you can to get back on track to the original term.
- Consolidate debts
Personal and car loans, credit and store cards, and even HECS, all will be making a difference to your bottom line. Refinancing these debts over a longer period of time and/or at a lower rate will reduce the repayments, although you also need to be aware of the additional interest incurred as a result. For example, a car loan of $50k at 6% with a balloon payment of $20k over 3 years would incur repayments of around $1,000 per month, but if you refinance over 30 years on a rate of 4.39%, it would reduce to $250 per month. The difference alone will be close to the amount required to cover the repayment increase from the recent rate rises, although the interest over 30 years would be around $40k, compared with the car loan of $6,455. We’d once again strongly recommend you treat this as a short-term solution only and try to pay the loan off as quickly as you can.
HECS is the forgotten one, as it “seamlessly” comes out of your pay, although for someone on a $100k p.a. salary, the repayments would be close to $580 per month. If the balance was $30k and you refinance over 30 years, you can reduce this to about $150 per month, but the interest would be higher as it’s over a longer term. One thing to keep in mind though is that whilst interest rates increase, so does the index rate of your HECS debt.
- Apply for hardship
Your bank will always want to work with you to try and ensure that you don’t default on your loan. The last thing they want to do is take over the sale of a property for a customer who was unable to make repayments on their loan, especially if it results in a financial loss for them, so if the rate rises are giving you the feeling that this may happen, we’d urge that you get in touch with them as soon as you can. They hate surprises, so if they are the ones calling you to make your repayment, they won’t be as favourable as if you let them know first.
Options such as a repayment pause, switching to interest only, or both, could be on the table, although they are to be seen as temporary only. In other words, they’d have to feel comfortable that for the period of time they pause or reduce your repayments, you’re doing something about getting back on top of them. This could be finding a job (if you lost one), returning from parental leave, selling your property, etc. If you’re considering this option, you’ll need to contact the lender yourself as they’ll discuss your eligibility over the phone.
All of these options aside from refinancing to a lower rate will end up costing you more in interest, so it’s extremely important that you have a game plan to figure out how you’ll get back on track with paying down your loan. The refinance options also require the standard loan application assessment, so we’ll need to demonstrate your ability to repay the loan with the buffers the lenders put in place.
If you have any questions about any of these options, please feel free to get in touch and someone in our team will be able to assist.