Interest rates are rising, with the Reserve Bank of Australia (RBA) recently implementing the biggest one-off rate rise in 22 years, and more predicted. Unfortunately for borrowers the current rate increases will keep snowballing.
Some residential property borrowers made the most of low interest rates to increase savings as insurance against rate rises, with a record $232 billion in offset accounts, nearly 15%, or a $30 billion increase in the last 12 months, and many are ahead on repayments.
However, if you are feeling the pinch of rate rises, it’s now more important than ever to put your weekly spending under the microscope and make changes to your lifestyle and tighten the budget, to ensure you spend less each week.
That might be as simple as reducing the number of takeaway coffees you have each week, bringing your lunch from home and reducing the amount of takeaway consumed and dinners out. It’s also time to do some comparisons on what you’re paying for your energy, health care, internet and phone, to see if there are any savings to be made. With food shopping, have a budget, make a list and stick to it and take advantage of weekly specials. And if you have a car, look at ways to reduce your weekly use, perhaps even opting for public transport where you can.
If you have a variable home loan rate, it could be time to do some comparisons and shop around, just like you do for your other household expenses. Moving to a cheaper lender may give some relief to your budget when everything is on the rise.
Along with cost-of-living increases, many mortgage holders are now looking at the possibility of refinancing.
Mortgage stress occurs when you pay more than 30% on your home loan.
Refinancing will depend on your individual circumstances. With the recent changes, it’s a good time to review your current home loan to see if it still meets your needs. There are costs involved to switch, so it’s important to seek sound financial advice if you are considering refinancing.
Reasons to consider refinancing
More rate rises are likely
With more rate rises predicted, variable home loans will see repayments increase as lenders pass on interest hikes. If you’ve been with the same lender for a while, now may be the time to calmly explore what’s on offer elsewhere.
Perhaps your financial situation or objectives have changed from when you first took out your home loan. Or, you may want to consolidate debt, using your equity, by refinancing your mortgage for more control of your finances, or even for bigger purchases like home renovation or getting into an investment property. Debt consolidation has its pros and cons, so speak with a financial adviser to see what’s best for you.
Different options such as a redraw facility or offset account
Loan features such as these allow you to save interest and get ahead. A redraw facility means you can make extra repayments on your mortgage and save on interest, but still access funds should you need them.
An offset account allows you to deposit money into a transaction account that’s linked to your mortgage. Deposited funds are offset against your loan balance, reducing your interest.
Key issues borrowers should consider:
- The impact of rising rates on repayments and household expenses. Can extra repayments be made before the next rate rise? What rates are currently on offer?
- Consider fees and charges and how long it will take to recoup in lower interest repayments. Breaking a fixed rate can cost thousands. Request a detailed breakdown before any change, including application, settlement and discharge fees. Some low fixed rates roll to high variable rates after the fixed term, which will also affect the comparison rate.
- State government fees vary between states but expect to pay between $300 and $500.
- Ensure the loan is portable, so could be switched to another property, by checking the small print conditions.
- Check the loan features. Does it include an offset account and allow additional payments?
- Will you have flexibility in case of unexpected events? For example, some lenders offer short-term repayment “holidays”. Alternatively, does it accept reduced payments instead of full suspensions, or a combination of both?
- What support is offered? For example, call centres, a branch network or internet access.
With the current economic climate, it’s prudent to do some health checks on your financial position with a professional advisor, to decide what’s best and whether refinancing is right for you.
Acknowledgements: RateCity, Financial Review, Duncan Hughes, Christopher Foster-Ramsay, Foster Ramsay Finance.