If you have a home loan, or are in the market to buy a house, you are most certainly aware by now that interest rates are rising at a rapid rate. The Reserve Bank has this month raised the cash rate by 0.5 of a percentage point for the fourth straight month in a row, and governor Philip Lowe has said the board expects to increase interest rates even further over the months ahead. The cash rate target of 2.35 per cent is the highest since the beginning of 2015. As a result, home loan rates are also certain to rise.
Governor Lowe’s post-meeting statement once again reiterated that the bank’s board is “committed to doing what is necessary” to bring inflation back within the bank’s 2-3 per cent target range “over time”. Analysis by RateCity suggests that this most recent increase will add an extra $200+ per month to repayments on a $750,000 mortgage. The total increase in monthly repayments on a $750,000 mortgage since the RBA began lifting the cash rate from its all-time low of 0.1 per cent in May, will be over $900.
These rises aren’t unprecedented; in 1994, the cash rate went from 4.75 per cent to 7.5 per cent in just five months. All the same, things may be feeling a bit scary in your household right now. So what should you do in response? Here are five suggestions:
Don’t panic, there are many ways to survive and thrive in these challenging times. Your lender wouldn’t have approved your mortgage unless they were sure that you could cope with a worst-case-scenario series of rate rises. So unless your financial position has severely deteriorated since then, you should be able to cope with higher repayments. While a higher mortgage repayment may strain your budget and certainly cause concern, it’s most likely never going to get to the point where you must default on your mortgage. Soaring rates, increasing inflation, and oil price hikes are all part of the economy. There are things you can do to prepare for rate rises and keep your finances on track.
It may help to understand exactly how the rate increases will impact your bottom line. If you have a financial planner, mortgage broker or someone who can assist you in these matters, book in a catch up. By understanding how much more money you need to find each month, you can start to make the proper arrangements. Stay positive and don’t despair. Rising interest rates can be challenging. Talk to one of our expert lenders if you need help understanding your options.
If you think you might struggle to continue making your repayments, contact your lender now to discuss your options. It’s important you make contact before you miss a repayment, not after, because the more warning you give your lender, the more flexible they’re likely to be. No one wants you to default on your loan. Understand your options. If you’re struggling to make ends meet, there are other avenues you can take.
When speaking to your lender about your circumstances, see if they have available options to defer, pause or reduce your repayments if you are suffering from financial hardship. Many lenders in Australia offer a hardship policy, and you should speak to them if you feel the situation is becoming too difficult for you to manage.
Make a budget and commit to it. This will help you stay across your finances and ensure you’re not overspending. Understanding where your money goes is important for anyone, under pressure from rate rises or not. If you don’t already have one, create a budget that encompasses all of your income and all of your expenses. Make sure that you capture everything, including major expenses (such as loan repayments, bills, groceries, and fuel) and also smaller expenses and luxuries, (like take-away, streaming services, etc.). Once you have an idea of your actual cash flow, you can start to make more informed decisions about your spending.
If rates increase, you must find the increased repayment in the budget somewhere. Assume your mortgage rate will rise by 2 percentage points. Calculate what your new monthly repayment would be and start paying it now. You can put the extra money into an offset account, a redraw facility or a special savings account. If you have a variable home loan, an offset account can be a useful tool. You can still use it as a regular transaction account but, just by having the money sitting there, it reduces how much interest you’re paying on your loan.
Finding crafty ways to reduce your expenses could give you a bit more breathing room as rates rise. When times become a little tougher, it’s always good to look at where your money is going and try to reduce your habit-spending where possible. We tend to overlook smaller purchases, like your daily take-away coffee, that bottle of wine with dinner, or other minor impulse purchases. Perhaps you could skip dining out every couple of weeks, cancel your weekly meal box or reassess some of the household brands you buy. Reducing your overall spending is the main objective if you find yourself needing to free up some extra cash to make way for increased repayments.
Now could also be a great time to ask for a raise or a promotion. Employees are in a unique position to ask for a raise this year, because high inflation and tight labour markets are expected to continue. Additionally, you could look for new income opportunities on the side.
The home loan market is intensely competitive, which is why lenders often charge new borrowers lower interest rates than loyal customers. So you could be making big savings by refinancing to a lender offering a comparable loan at a lower rate. Try finding one with an offset account attached to the loan account. This is an effective tool to bring down the amount of interest you owe whilst providing you with available funds for any emergency that may arise.
Don’t give up. rising interest rates can be challenging. Talk to an expert lender if you need help understanding your options.
The expert lenders at The Hrkac Group are committed to helping borrowers get the most from their lending. Our in-house team of financial experts can help you create a financial plan that works for you and your individual circumstances, and can help you make the right decision about managing your home loan. If you want to discuss your options, speak to an expert Geelong Mortgage Broker at The Hrkac Group.
Our Geelong Mortgage Brokers’ expertise and experience in facilitating your home loan can help ensure a positive experience for you. To make an appointment to meet one of our friendly Geelong Mortgage Brokers today, feel free to contact us via email or phone (03) 5224 2366.