The Reserve Bank of Australia (RBA) announced its first rate hike in almost ten years, lifting the official cash rate to 0.35%. The major banks have already announced to pass on the rate hike in full to their variable-rate home loan customers, and many other banks are likely to follow suit.
How much is the rate hike going to cost you?
If you are paying a variable rate on your mortgage, you are likely to pay more interest on your home loan in the coming months if your lender decides to pass on the rate hike to you. Assuming you are currently paying interest at 2.50% on a $500,000 loan with 25 years remaining, your repayment amount will increase by $65 a month if your interest rate were to rise by a quarter of a percentage. In other words, you’ll shell out an additional $19,000 over the remaining mortgage term. You could use an online mortgage repayment calculator to determine how much you’ll need to pay each month if your mortgage interest rate rises.
Some experts believe borrowers will not be affected much by the rate hike, as lenders generally calculate loan serviceability at a higher rate than what is actually offered to customers. It means unless your financial situation has changed for the worse since you first took out the loan, a 0.25% rate hike should not cause a significant strain on your finances. However, that doesn’t mean you are not going to feel the pinch, especially when further rate hikes are predicted and the cash rate is expected to reach 2.5% at the end of 2024.
So what can you do to protect yourself from the increasing interest rate on your mortgage?
Here are three tips you might want to consider:
1. Maximise your savings
There are always two sides to a good savings plan. The first part is preparing a budget and cutting down on unnecessary expenses to increase the amount of money you can save. The second part is investing it wisely or using it to pay off your debts to achieve financial independence.
An increase in the official cash rate means the interest you earn on your savings might also increase. However, it’s up to you to decide whether you want to keep your money in savings, invest it in shares or any other form of investment, or use it to make extra repayments on your mortgage to reduce your debt while the interest rates are still low.
If you are worried about future rate hikes, making some extra repayments into your home loan now could save you some money in interest in future. If you have a redraw facility available, you might still be able to use this money for personal expenses in case of an emergency. Another option is saving money in a 100% offset account linked to your mortgage to reduce the interest you pay on your home loan.
3. Consider fixing your home loan
Interest rates on fixed-rate home loans are generally higher than variable-rate home loans. However, if you can get a competitive fixed rate on your home loan now, you might be able to shield yourself from future rate hikes in the next two to five years (depending on the duration of your fixed term). The downside is that you might find yourself paying more than what you are currently paying on your home loan because your variable-rate home loan is likely to be cheaper than a fixed-rate home loan right now. Still, if you are extremely worried about future rate hikes and prefer to have the certainty of fixed repayments on your home loan, moving to a fixed rate might be an option you want to consider.
You can speak with a broker to understand the difference between fixed and variable rate home loans. While a fixed rate means you’ll pay a known amount of money towards your home loan each month for a specified period, you might not have access to features like an offset account or free additional repayments. It’s also more expensive to prepay or refinance a fixed-rate mortgage, as your lender might charge you a fee for exiting the loan during the fixed period.
3. Search for a lower rate on your home loan
Even though the big four banks have decided to pass on the rate hike in full to their variable-rate home loan customers, there will likely be a few non-bank lenders and smaller banks who won’t increase their variable rate, at least immediately, to remain competitive and potentially get more business.
If you are currently paying anything with a three in front of your interest rate, you can most probably find a cheaper deal if you look around. There are still some lenders who are offering a variable interest rate of 2% or lesser on their home loans. Shifting to a lower interest rate will not only reduce your monthly repayments but also protect you from a couple of subsequent rate hikes. But you need to keep in mind that refinancing is not free, and it’ll cost you some money to switch lenders.
You might want to negotiate a discount with your lender, asking them to match the best deal available to you on the market before you apply to refinance with another lender. If it doesn’t work, you may consider switching your lender, but it’s worth calculating how many months it will take you to recoup your refinancing costs.
You should also have a good credit score when you apply for refinancing, as the lender is likely to go through your income and credit history to determine your eligibility for the loan.
Seek help from an expert
If you are confused about your options or don’t have the time to research the market for home loan deals, speaking to a mortgage broker could help. A mortgage broker can tell you about ways to pay down your home loan faster. They can also help you negotiate a discount with your lender or find refinancing deals with a low-interest rate and features that will be helpful for you to manage your loan in the long run. Note that you generally don’t pay anything to use the services of a mortgage broker. However, they must act in your best interest as per the industry regulations that bind them.
