The new year is the perfect time to rest, reset and make goals for 2022, but many Australian homeowners may not think about making financial goals and resolutions.
Just as you might set out to create workout objectives or start a new job, it can also be worthwhile to make new year’s resolutions for your home loan.
2022 home loan rate predictions
The Reserve Bank of Australia (RBA) has kept the cash rate on hold at 0.10% since November last year, and RBA Governor Philip Lowe, does not anticipate increasing it until 2024. At a conference in Wagga Wagga this week, Governor Lowe said that the board would not increase the cash rate until “actual inflation was sustainably in the 2-3 per cent target range.”
“We are still a fair way from that point. In our central scenario, the condition for an increase in the cash rate will not be met next year,” Governor Lowe told the CPA Australia Riverina Forum.
However, many experts have predicted that home loan interest rates could be on the rise sooner than expected. Earlier this year, CommBank tipped that we may see a cash rate hike as early as November 2022.
Big banks have still lifted their home loan interest rate out-of-cycle of the RBA, despite no rate changes this year. The big four banks in particular have hiked their fixed home loan rates three to four times each in the last two months.
For homeowners, this means that the interest rate you may be paying could change dramatically in 2022 – even without a cash rate increase. And it’s no secret that homeowners are taking on greater amounts of mortgage debt than ever before, so a rate increase may seriously impact household budgets.
APRA recently made changes to mortgage serviceability assessments in response to the increase of debt after its June report showed 21% of homeowners were borrowing over six times their income. In response, APRA has requested lenders test a borrowers’ ability to service a loan at a rate of 3%, instead of 2.5%.
This is why it is more important than ever you are aware of your home loan rate and set financial resolutions, particularly if a rate increase could impact your household budget.
So, let’s explore some of the top new year’s resolutions for your home loan.
Reduce Home Loans new year’s resolutions for your mortgage
1. Make extra repayments
Whether or not you believe interest rates may rise in the next few years, it’s always worth considering how chipping away more at your home loan principal could help you in the long run.
If your home loan lender allows you to make additional repayments (and most Reduce Home Loans do), reducing your principal by more than your minimum monthly repayments could save you thousands in interest charges and shave years off your mortgage.
For example, you have a 30-year loan term for $400,000 mortgage paying a rate of 2.5%, and five years into the mortgage you decide to pay an additional $300 a month. Over the life of your loan, this may save you 27,061 in interest charges and shave five years and two months off of your mortgage.
Making extra repayments may be a more suitable option for owner-occupiers than investors, as the latter will want to reduce any expenses going into their investment property if their goal is to sell for a profit as soon as possible. For first home buyers, making extra repayments for your new home may set you up for good financial habits from the very beginning.
2. Use your offset account
An offset account can be a competitive feature for any home loan, but if you’ve not been taking advantage of yours before, you may be missing out. An offset account is like a transaction account linked to your home loan, but any funds you deposit into the offset account work to ‘offset’, or reduce, the amount of interest you pay.
This new year, take stock of your budget and look to see if you can redirect any income or lump sum payments, like bonuses or a tax return, into your offset account. By starting in January, you may be able to transform your mortgage repayments over the year. Generally speaking, the interest will be calculated daily but paid monthly, so that the longer your funds are in your offset account, the more you may save in interest.
For more information on how depositing funds into your offset account could reduce the interest you pay on your mortgage, please use Reduce Home Loans Offset Account Calculator.
3. Renovate with your redraw facility
As we move into 2022, it may be worth considering how any extra repayments you’ve already been making into your mortgage could work even harder for you if you put them into renovating your property.
If your home loan offers a redraw facility, you may be able to draw down on these additional payments you’ve made into your mortgage. One of the most popular purposes for accessing these funds is for home maintenance, improvements and major renovations to boost your property’s value.
Reduce Home Loans has previously discussed six of the best ways to boost your property’s value through home renovation, and, if you’re looking for inspiration, here are some of the most popular renovation trends for 2022.
4. Refinance to a lower interest rate
Your final home loan resolution for 2022 should be to take stock of your current mortgage and determine whether it is best serving your budget and financial situation. If you’re not aware of the home loan rate you’re currently paying, check your banking app or online banking to see what rate you are being charged.
The current average outstanding variable home loan rate for owner-occupiers is 3.02%, according to the RBA. And if interest rates do increase over the next few years, your mortgage repayments could start to seriously impact your household budget.
Lenders like Reduce Home Loans are proud to still be offering mortgage rates starting with a ‘1’. So, if you’re sick and tired of paying too much in interest rate charges, and/or if you predict your bank may hike rates in the next few years, consider taking preventative action now.
Switching to a lower rate home loan lender may save you thousands in interest charges over the life of the loan and protect your household from future rate hikes. And, if you refinanced to a lower rate loan and continued making the same mortgage repayments with your new loan, you may be able to shave years off of your mortgage too via these extra repayments.
Keep in mind that refinancing your mortgage is a serious financial decision that requires you to meet the lending criteria set by a new lender. This may include meeting loan-to-value ratio (LVR) minimum requirement or a credit score minimum. If you’re unsure of the state of your credit history, it may be worth getting a copy of your credit report before you apply to refinance to check for any errors or areas for improvement.
For more information or to speak to someone about your refinancing options, reach out to our friendly Personal Finance Managers.
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.