Talk of a cash rate hike from economists resulting in higher mortgage repayments may have borrowers wondering what they can do today to prepare their household budgets.
On Friday, Reserve Bank of Australia (RBA) Governor, Philip Lowe, said that it was “plausible” the official cash rate, which has sat at an historic low of 0.10% since November 2020, may rise this year. He went on to state it would be “prudent” to prepare for higher rates.
A cash rate increase in 2022 would be the first RBA-led hike to mortgage interest rates in 11 years, with the last occurring in November 2010. In fact, recent RateCity research found that this equates to over 1.1 million households that have never experienced an RBA rate hike.
Over a 30-year home loan, it’s reasonable to expect that interest rates will fluctuate. However, everyday Aussies are already struggling with the rising cost of living thanks to record-breaking petrol prices and pandemic-related supply chain issues. And our home loan debt is still on the rise, with the average Australian home loan up 17.1% from January 2021 to $635,609, according to ABS Lending Indicators.
This is why it may be worth looking at your options and your budget to take action now and prepare for an interest rate hike.
How much would a rate hike impact your mortgage?
Let’s say a homeowner is repaying a 25-year, $500,000 home loan at the RBA’s average owner-occupier rate for outstanding loans of 2.94%. Then, the RBA hikes the cash rate just 15 basis points to 0.25% and the homeowner’s lender increases their interest rate accordingly to 3.09%.
This would mean their monthly mortgage repayments would rise by $40 to $2,395. While this may seem small, over 12 months (excluding additional rate hikes) this means budgeting an additional $480 towards your mortgage.
This is the equivalent of an average quarterly energy bill, or some household’s monthly grocery bill.
Impact of a cash rate hike – repayments on 25-year, $500k home loan
|Home loan rate
|Repayments over 12 months
Source: Reduce Home Loans Repayment Calculator, RBA Lender’s Interest Rates.
Note: Based $500k loan on a 25-year loan term. Does not factor in fees.
However, homeowners do not need to panic just yet. There are still options available to you that may help to reduce the impact of a cash rate hike.
How to prepare your home loan for an interest rate rise
Here are some options homeowners have to take action today and help potentially lessen the blow of a cash rate hike on their mortgage repayments.
Make extra repayments now
One option homeowners have to help reduce the financial impact of a mortgage rate hike is to try and chip away at their principal owing through additional repayments. If your home loan lender allows you to make extra repayments without penalty, like all Reduce Home Loans mortgages, then you could consider doing this as soon as possible.
Whether it’s $50 or $250 more a month, any additional funds you can pay into your mortgage can help to reduce the principal amount owing. This in turn will reduce your ongoing mortgage repayments and potentially save you in interest charges.
If you’re currently repaying other debts, such as a credit card, a personal loan or a car loan, it could be worth paying these off as soon as possible, so you can divert more of your funds towards chipping away at your home loan principal.
Take advantage of your offset account
An offset account is a popular home loan feature that is linked to your home loan. Any funds you transfer into this account can help to reduce the amount you may pay in interest as it is “offset” against your home loan balance. Unlike extra repayments which chip away at your loan principal, utilising your offset account may mean you pay less in interest each mortgage payment.
For example, a homeowner on the same $500,000 home loan with $50,000 in their offset account would only pay interest on a balance of $450,000. The $50,000 in their offset account has worked for them to reduce their interest payable.
One of the benefits of an offset account is that you are able to dip into these funds when needed, such as to pay for a home renovation. So, if interest rates fall again and you no longer need your offset account balance to reduce your interest payable, the funds in your offset could help finance these home projects that may boost your property value.
Refinance to a low rate lender
Customers with the big four banks may be paying higher interest rates than if they switched to a lower rate home loan lender.
According to Mozo, the lowest big four bank variable owner-occupier rate for February was 2.29%, (based on a 20-year, $400,000 loan with an LVR under 80%). And the average 3-year fixed rate for the big four banks sat at 3.37%. However, the lowest variable rate on the Mozo database sits at 1.77% – over 50 basis points higher.
If you’re anticipating your home loan lender may hike your interest rates, and you’ve been repaying your mortgage for some time and built up a little equity, it may be worth considering refinancing to give yourself a rate cut ahead of time. Switching to a low interest rate home loan now could give you the breathing room to prepare for future rate hikes.
Reduce Home Loans frequently breaks records by providing some of the most competitive interest rates on home loans, helping Australians to reduce their biggest ongoing repayment.
If you’re not already a Reduce Home Loans customer, you may not know that the lowest variable home loan rate in Australia of 1.77% is currently available from Reduce Home Loans to refinancing customers with LVRs of 80% or less.
And on that same 25-year, $500,000 loan amount, switching from the big four bank lowest rate of 2.29% to Reduce Home Loans’ 1.77% refinancing rate today could save you $162 a month in mortgage repayments.
Then when interest rates do begin to rise, you can rest in safe hands knowing that Reduce Home Loans will always strive to offer customers some of the cheapest home loan rates around.
Keep in mind that it may be work seeking further financial advice to assist you if higher mortgage repayments will make your financial situation more stressful.
For more information on the refinancing process, or to discuss how to keep your home loan repayments affordable with our customer service team, please don’t hesitate to call us on 1300 722 823 today.
Any statement/s are general in nature and do not take into account your financial personal situation, objectives or needs. You should consider whether any statement/s is suitable for you and your personal circumstances. Before making any financial decision, consider your circumstances and the product disclosure statement.