If you’re a homeowner paying off a mortgage, chances are you’ve been enjoying the current record-low interest rate environment. But what happens if interest rates rise?
But when it comes to the home loan market, what goes down must eventually go up again. Borrowers may be asking themselves when they can expect a cash rate increase, and what options do they have when their lender hikes their rate?
Home loan interest rates are influenced by a number of factors, including the Reserve Bank of Australia’s (RBA) cash rate, overseas funding costs, as well as the state of the economy, nationally and internationally.
RBA’s cash rate
While there hasn’t been an official hike to the RBA’s cash rate in over a decade, experts are tipping that it may happen soon. RBA Governor Philip Lowe has noted that the cash rate won’t be increased until inflation targets are met (two to three per cent range), which he expects won’t be until 2024.
Meanwhile, the RBA’s Term Funding Facility will expire at the end of June. This has to date allowed lenders to access funds ($134 billion) at low interest rates. A further $75 billion is available, and the RBA advises the facility will provide “low-cost fixed-rate funding” for three years, supporting low borrowing costs to, again, 2024.
When interest rates rise, what happens to your home loan will depend on one key factor: whether you have a fixed or variable interest rate.
If your interest rate is variable, it is subject to market fluctuation. This means that if the cash rate goes up and your lender follows suit, then so will your interest repayments on your mortgage.
If you have a fixed interest rate, your loan is still locked in at that set rate and your mortgage repayments will not increase just yet. But once your fixed rate period is over, chances are it will revert to a variable rate, or you’ll have the option to fix again in a potentially higher-rate environment.
If your mortgage is split between the two, then the portion that is on a variable rate will increase.
So, what options do everyday Aussies have to keep their mortgage repayments affordable if interest rates do rise in the next three years?
1. Make use of your offset account/redraw facility
If your home loan comes with an offset account or redraw facility, it may be worth taking advantage of these options if your lender does hike interest rates. These features are some of the easiest ways to reduce your mortgage repayments without having to refinance.
If your mortgage offers one or both of these features, the money paid into these facilities both help to reduce your ongoing mortgage repayments. With an offset account, the funds deposited ‘offset’ your mortgage balance, so your repayments are based on a loan amount minus any funds in said account.
With a redraw, you’re making extra repayments into your mortgage, which may be drawn down on at your request. By making extra repayments you’re reducing your principal and lowering the interest charges you’d pay over the life of the loan.
2. Shop around for a better deal
Some of Australia’s big four banks have already begun hiking their long-term fixed rates out-of-cycle, in anticipation of the potential cash rate hike. These are the same lenders that did not pass on the last RBA cash rate cut to variable rate customers in full.
If your home loan lender increases your interest rate you may want to consider shopping around for a more affordable option. Jump online and compare your options with comparison sites such as Canstar or RateCity, and use tools like Repayment Calculators to determine which loans are the most affordable.
Reduce Home Loans has consistently broken records by offering some of the cheapest home loans in Australia. As a home loan is typically a 25-30 year commitment, if your financial goals are to keep mortgage repayments low for as long as possible, it may be worth considering refinancing to a low rate home loan lender.
3. Ask your lender for a rate reduction
If your lender is hiking rates, especially if it’s doing so out-of-cycle with the cash rate, it’s worth calling up and requesting a rate reduction. If you’ve already gone through the processes in step two and researched lower-rate lender alternatives, such as Reduce Home Loans, you can use this as ammunition in your phone call.
You’ll also want to take stock of what rates your lender is offering new customers, as these are generally lower. First ask to be put on one of these lower new-customer rates. Then if they refuse, tell them you’d like them to reduce your rate as you’re considering refinancing to one of the other lenders you’ve researched.
If they still refuse to lower your mortgage rate, you may want to consider following through with step two and refinancing. After all, you’ve already done all the research and you know your goals are to nab a lower rate.
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Like death and taxes, home loan rate fluctuations are inevitable over the life of your home loan. But there are options worth considering if your new mortgage repayments are breaking your budget and you’re struggling financially. Look at helpful features for assistance, speak to your lender about a rate reduction or even consider if refinancing.