There are tough times ahead for mortgage borrowers.
Earlier this month, borrowers were hit by a 50 basis-point hike in the cash rate; the largest rate rise since February 2000. Sadly, rates are expected to continue rising sharply over the next year or so as surging inflation battles the global economy.
This is will have wide ranging effects on the property market with Westpac economists estimating that 90% of mortgage borrowers are directly exposed to cash rate increases over the next 18 months.
The big question is: what does this all mean for your home loan?
In this blog, we’ll try to sift through the jargon to give you the information you need to stay on top of your mortgage when interest rates are rising.
How high will interest rates go?
Currently at 0.85%, the major lenders are predicting more pain on the horizon. There has been strong speculation that another 50 basis-point hike coming in July as the RBA tries to reel in out-of-control inflation.
There is now a general consensus that the cash rate will pass 2% by the end of 2022, with many believing it could reach as high as 2.50-3.00% by this time next year.
If interest rates do rise by 2-3%, it may mean the average owner-occupier on a variable rate will have a mortgage rate around 5.00-5.50%. Whilst all figures at this stage are only estimates, we recommend preparing for the worst-case scenario when anticipating higher mortgage repayments.
How do I calculate what rising interest rates will do to my mortgage repayments?
If you have an existing mortgage on a principal & interest loan, your repayments may or may not change depending on your home loan situation. For a borrower who is ahead on their mortgage, it may mean the repayments stay the same size but a smaller share of the home itself is paid down with each instalment.
The best think you can do is call your mortgage broker or bank and ask them to help estimate what changing interest rates will do to your mortgage repayments.
If you are looking for a new mortgage or would like to understand the worst case scenario, then our mortgage repayment calculator might be a useful tool to make your own calculations.
You can enter the loan balance, interest rate, loan product as well as the repayment type and frequency. The calculator will show you estimated figure for your regular loan repayments, including what higher interest rates will do over the course of your loan.
Should I refinance while interest rates are going up?
Whether rates are going up or down, it’s always healthy to review your interest costs.
Banks are sales businesses and overtime your rate will increase to boost profit for shareholders.
As rates are going up at the moment, it’s a perfect time to assess your home loan options. Lenders are always offering incentives for mortgage borrowers such as lower rates for new customers and cash back offers.
If you are time poor, you can call your existing lender and ask them to review your rate, or outsource the work to a mortgage broker.
Should I be seeking a fixed or variable rate at the moment?
My view has always been to tailor your mortgage to align with your own situation and needs.
In the current market, fixed rates are roughly more than 2% higher than variable rates. This is due to the expectation that variable rates will keep increasing until they meet or exceed the current fixed rates.
Over the course of your mortgage, there will be times when fixed rates are lower than variables (as in the last 2 years) and times when it they higher (like they are right now). If you are unsure what type of loan is best for your situation, your mortgage broker will be able to help you understand your best available options. You can also use our home loan comparison calculator to estimate what different home loan products and options will mean for your monthly repayments.
Ultimately, the key question is how much do you value certainty, and at what cost?
How do I stay on top of my mortgage when interest rates are going up?
We recommend having a healthy budget process to ensure that you are on top of your financial and mortgage situation. This requires strong discipline and organisational skills but will be a hugely beneficial tool when tackling additional mortgage repayments.
Effective budgeting encourages you to seperate your needs from your wants, making sure that you can afford the expenses that you prioritise the most. To help plan a monthly budget, you can use our free budget planning calculator here.
Keeping your savings in an offset account can also be useful way to reduce your interest costs. Instead of this money sitting in a seperate savings account, having it work for your home loan can save you plenty in interest costs during times when rates are rising.
Lastly, keep in touch with your bank and/or mortgage broker on a consistent basis to get assistance with reviewing your home loan rate.
What if I can’t afford the bigger mortgage repayments?
In general, banks will want to help you back on your feet and have hardship lines that can assist in moving you to interest only or pausing your mortgage.
If you are worried about your capacity to afford larger mortgage repayments, there are a number of things you can do.
The first is to thoroughly review your personal budget and determine areas where there are potential cuts that you can make.
A mortgage broker or financial planner might also be able to help in times like this and can advise you on the best options for your personal financial situation.
If you feel like you are in serious distress then you should definitely be seeking professional help.
Experiencing financial stress can have a heavy impact your mental health and is something to be taken seriously. If you're feeling overwhelmed by money issues, it's okay to ask for help.
Contact Beyond Blue on 1300 22 46 36 (24 hours a day). Or use Beyond Blue's web chat (3pm to 12am).
Should I make additional mortgage repayments now before interest rates go up further?
Getting ahead of your mortgage is a nice way over time to repay your loan faster.
If you do have excess cashflow then repaying your mortgage faster or saving in offset account is a great and simple way to do so. In general, we prefer using the offset account as you’ll have access to these funds if you ever need it.
Ensure that any actions you undertake are not making life harder from a personal cashflow point of view. Once again, you should also seek advice from a trusted professional for help on the best strategy for your individual situation.