Whether you’re a first home buyer or a current homeowner, having a large home loan debt can feel overwhelming – especially with interest rates tipped to increase over the next few years.
And with property prices at eye-watering levels across the home loan market, particularly in capital cities like Sydney and Melbourne, keeping your home loan repayments affordable is more important than ever.
Australian housing prices have skyrocketed over the last 12 months, with the latest CoreLogic Home Value Index figures recording annual growth of 20.3 per cent. This growth rate is the fastest pace recorded since the year ending June 1989.
However, monthly growth rates for national values are beginning to slow, easing back to 1.5per cent in September from 2.8 per cent in March.
CoreLogic research director, Tim Lawless, noted that the slowing growth conditions might be the result of “higher barriers to entry for non-homeowners along with fewer government incentives to enter the market.”
“With housing values rising substantially faster than household incomes, raising a deposit has become more challenging for most cohorts of the market, especially first home buyers,” Mr Lawless said.
The rising value of the housing market has also seen homeowners take on greater levels of debt.
Comparison website, RateCity, analysed Australian Bureau of Statistics data to find the average new home loan in NSW and Victoria for August 2021 had risen by more than $100,000 in just a year.
The increasing size of home loans in Australia has had further impacts this week, with the Australian Prudential Regulation Authority (APRA) announcing new monetary policy that increases the serviceability interest rate buffer banks use to test borrower’s income from 2.5 per cent to 3 per cent.
The change comes in response to new data showing 21.9 per cent of all new home loans from the June quarter had a debt-to-income ratio of six or more. Meaning, almost a quarter of new home loans were at least six times the income of the borrowers.
The Reserve Bank of Australia has kept the cash rate on hold at an historic low of 0.10 per cent since November last year. Governor Philip Lowe has indicated that the cash rate will not increase until target inflation levels are met, hinted to be as early as 2024. However, some economists have tipped a cash rate hike to be expected as early as next year.
But with national property values sky high and the value of new home loans at risky debt-to-income levels, many first-time buyers and existing homeowners may be wondering what they can do to protect their budgets from future rate increases.
Reducing mortgage costs and avoiding the sting of rising rates
One of the best options borrowers have to ensure they’re not overwhelmed by their mortgage repayments and rising interest rates is to opt for a lower-rate lender.
The interest rate attached to your home loan is one of the most significant factors impacting overall cost. While there are other home loan components that need to be taken into consideration, such as loan amount, fees, features, and how the loan may suit your financial situation, the interest rate is generally considered one of the most important areas to prioritise.
First home buyers
Before you begin scrolling through real estate listings, it’s worth considering how you can strengthen your home loan application.
First home buyers may not be aware that some of the most competitive home loan interest rates are typically reserved for home buyers who meet a certain low-risk category of a lender’s eligibility criteria.
- Saving a deposit of 20 per cent or more – A larger home deposit showcases a greater level of financial discipline and reduces your loan-to-value ratio (LVR). Generally speaking, home loan lenders may offer lower interest rates to borrowers with an LVR of 80 per cent or less.
- Boost your credit score – Having a good to excellent credit score is fundamental for most Australian lenders when considering who to offer credit to. If your credit score is on the lower side, it may be worth working on increasing this before you apply for a home loan.
- Longer-term employment – Another criteria common in home loan applications is that the borrower be employed for at least 3-6 months at their current employer. If you’ve just started a new role and are still in the probation period, it may be worth waiting to pass this before you apply to boost your application.
- Government assistance – There are a range of government buyer schemes available, including the First Home Loan Deposit Scheme helping applicants gain loan approval with deposits as low as 5%. You may also want to look at First Home Buyers Grants, as well as stamp duty concessions or exemptions to boost your application and potentially increase your chance of being offered a low rate loan.
- Fixed rate home loans – If you’re looking for some insurance that your home loan rate will not fluctuate over the next few years, it may be worth considering a fixed rate loan option. As variable rate home loans are subject to market fluctuation, if rates are tipped to hike, a fixed rate option may offer some protection for your budget.
It’s no secret that homeowners who’ve been repaying their mortgage for a number of years, whether for an investment property or residential property, may find that they’re paying a higher interest rate than those offered to new customers. This phenomenon, also known as a ‘loyalty tax’ exists as mortgage lenders use lower-rate home loans as a way to entice new customers on to their books.
According to the latest RBA Housing Lending Rates for August 2021, the average outstanding variable owner-occupier interest rate sat at 3.03 per cent. However, the average variable, owner-occupier interest rate for new loans was 2.68 per cent.
For existing customers hoping to reduce their home loan interest rate to protect from future rate increases, it may be worth considering refinancing to a lower-rate loan option.
Online lenders, such as Reduce Home Loans may also offer mortgages with the same features and flexibility as the big four, with more competitive interest rates. Not only can reducing your interest rate help to save you money from ongoing interest charges, but it may also shave years off your loan if you make extra repayments by setting your new payments at your original rate.
For a homeowner on the average variable, owner-occupier rate of 3.03 per cent, refinancing to a 1.77 per cent interest rate home loan would mean giving yourself a rate cut of 1.26 per cent.
And on a 25-year, $400,000 home loan, this would mean switching from monthly repayments of $1,903 to monthly repayments of $1,651. Over 12 months, this equates to a saving of $3,024.
For more information on refinancing your mortgage, or to speak to one of our home loan experts, please contact Reduce Home Loans on 1300 733 823.
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