What to do when rising rates impact your mortgage repayments

Find out what to do when your mortgage repayments rise

17 May 2022|4 minute read

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The cash rate has started rising for the first time since 2010, with lenders already starting to pass this increase on to borrowers by hiking interest rates on home loans.

Interest rate rises can be an uncertain time for borrowers. In this article, we provide 6 tips for handling an increase to your home loan interest rate.

1. Remember your lender has to follow responsible lending laws

When you first apply for a home loan, lenders assess your ability to pay back the loan based on factors like your income, assets, liabilities and credit score.

They’re also required by the Australian Prudential Regulation Authority (APRA) to use a minimum interest rate buffer. This buffer is applied by lenders to see if you could still meet your home loan repayments if your interest rate was to rise by 3% (this buffer was increased from 2.5% late last year).

Chances are, the recent changes to interest rates will sit within this buffer range and you will still be able to comfortably repay your loan. Many Australian households are ahead on their mortgages and have built up savings over the course of the pandemic which can act as a buffer when rates rise.

Plus, interest rates will increase incrementally and slowly, so you will have time to make adjustments to your budget and chat with your lender if you think you’re at risk of experiencing mortgage stress.

Try using Aussie’s mortgage repayments calculator to see how a rate rise could affect your repayments.

2. Consider fixing your interest rate 

Although there have been increases to fixed interest rates over the last few months – and they will continue to rise now the cash rate has increased – it is still possible to lock in a competitive fixed interest rate on your home loan.

Choosing a fixed rate can protect you temporarily from interest rate hikes, and gives you certainty when it comes to your monthly repayment amount. Typically, fixed rate terms can be between 1-5 years.
 
If you don’t want to fix all of your loan, you could opt for a split interest rate loan. This type of loan allows you to have a fixed interest rate on a portion of your loan, while the other portion is subject to a variable interest rate.

It’s important to check over the conditions of your fixed rate loan carefully to make sure you don’t incur break fees if you want to refinance before the end of your fixed term, for example.

3. Use your redraw facility and offset account

Do you have a redraw facility or an offset account attached to your home loan? Both of these features can help you handle an interest rate rise.

Making extra repayments on your loan not only reduces the amount of interest you pay overall, but you can also withdraw these extra repayments from your redraw facility should you need them down the track. 

Having a decent sum in your offset account can also help once rates rise. The balance in the account will offset your home loan balance, reducing the interest you pay. 

For example, if you have a remaining home loan balance of $470,000 but an offset account balance of $20,000, you will only pay interest on $450,000. 

If you can, continuing to keep your offset account balance high when rates are rising could help you pay less interest on your home loan overall.

4. Pay down and consolidate your debt

If you have other debts, it’s likely that interest rates are rising on them as well as on your home loan. Getting on top of any other existing debts can help you handle a home loan rate increase. These debts might include:

  • Car loans
  • Personal loans
  • Credit cards
  • Bills (e.g. electricity, internet)

You may be able to save some money by combining your debts with your home loan. This is called debt consolidation, and it allows you to bundle several debts with your home loan so that you only make one monthly payment.

Since home loan interest rates are typically lower than interest rates on other debts like credit cards, you can potentially pay less interest than if you were repaying the debts separately.

5. Check your home loan is still competitive

Even though rates may be rising across the board, it’s worth checking to see if your home loan is still competitive compared to other products on the market. 

You might also want to check if you’re paying for loan features you’re not using, like an offset account, a credit card or bank account that came in a package with your loan. 

If you find a more competitive deal elsewhere, it could be a good idea to chat to your lender before you refinance. 

You can ask your lender about lowering your rate, and they may oblige, especially if you’ve been a responsible borrower. You can also ask your local Aussie Broker to do this on your behalf.

If your lender won’t budge, then it could be time to refinance your loan with another lender. Remember to compare all loan features before you refinance, not just the interest rate. 

You might find a loan with a low interest rate, but if it doesn’t have the features you need – like an offset account or redraw facility, for example – then it might not be suited to your needs.

6. Review your spending habits

Once you’ve reviewed your home loan and done what you can to save, it could be time to review your other expenses too.

Taking a look at where you could cut back might be a good start. Consider easing off on online purchases for a while or reining in spending on takeaway food, for example.

You might want to check if you could save on any insurance policies you hold, such as home and contents insurance or health insurance.
 
Comparing your electricity, gas and internet providers can help you work out if there are more competitive deals around that could save you money.

One of the benefits of increased interest rates is that you can earn more interest on your savings. Shop around for a high interest savings account – this way, your cash flow is increased with very minimal effort.

Do you want to save money on your home loan? Book an appointment with your local Aussie Broker to discuss your options.

Book a chat with an Aussie Broker

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