(5 minute read)
We're well aware at Cuppa that many of you are facing financial hurdles in the wake of soaring interest rates. That's why today, we've invited Cuppa's very own financial coach and expert, Betsy Westcott, to shed light on the current financial landscape and share invaluable steps to navigate it successfully
Since the start of 2023 over 730,000 fixed rate home loans have expired, according to analysis from Ratecity.com.au, subjecting borrowers to an unsettling transition into new variable rates. A further 150,000 home loans are set to expire before the end of the year, according to RBA data. The Reserve Bank of Australia's aggressive 12 interest rate hikes since May 2022 have pushed the cash rate from a mere 0.1% to a staggering 4.1%, marking the sharpest and swiftest rate rise in nearly three decades. Consequently, what was once a comfortable home loan rate commencing with a modest 2 is now poised to leap to a 6 or higher for mortgage holders with an expiring fixed rate. If you have a mortgage of $1,000,000 this abrupt adjustment translates into a daunting $2,229/month in extra repayments - that's $26,748 a year. Such a rapid and substantial rise in home loan repayments signals significant strain being placed on household budgets.
Data from Mozo Money indicates that more than 39% of all mortgage holders are spending in excess of 30% of their household income on their repayments. This is worrying as mortgage repayments in excess of 30% of total household income typically indicate mortgage stress. Unsurprisingly, the National Debt Helpline which is a resource available to help those in need access free financial counseling is receiving an uptick in calls. What’s most remarkable is that many individuals contacting the National Debt Helpline are doing so for the first time in their lives and would be considered affluent with incomes in excess of six figures.
While the inevitable expiration of fixed-rate loans looms large, there are proactive steps borrowers can take to mitigate the impact of higher interest rates and secure the best possible rate. Here’s five proactive steps you can take to minimise mortgage pain:
Reach out to your home lender
Before your fixed rate expires, find out what interest rate you can expect to roll onto and what monthly repayment that equates to. Get into the habit of paying that new repayment by beginning the equivalent of that payment now so it’s not such a shock when it happens. Not only will it get you used to paying a higher repayment but it will also build up your cash buffer.
Negotiate a better rate
Mortgage Broker Sandy Kelso from Kelso Finance Mortgage Brokers, said ‘You should absolutely be negotiating your variable rate home loan with your bank. Don’t take their first offer. I’m seeing very few clients taking new fixed rates as the fixed rates on offer are still too high. Plus many of them expect rates to go down next year which is in line with many economists’ forecasts’. To negotiate a better deal you first need to do some research into what variable rates are on offer for similar home loans. You can simply jump on a comparison website like Compare the Market, Finder or Canstar or talk to a mortgage broker. If you find a lower rate being offered for a similar loan type to yours then take it to your bank and ask them to match it.
Consider Refinancing to a new lender
If your existing bank isn’t coming to the table with a great rate then it’s time to switch to an alternative lender. There’s lots of competition for new customers and many lenders are offering incentives like cash backs to win your business. It can take a few months to complete a refinance from beginning to end. A good mortgage broker can be your ally in the process to help you navigate which financial institution has the best deal for you and assist you in organising all your paperwork to make the process as seamless as possible.
Reprioritise your spending where possible
The rise in the cost of living has impacted everyone’s day to day expenses. It’s imperative that you review you current spending to understand where your money is going and reprioritise any spending that is unnecessary or not giving you value. Look at things like bills that you can switch to a better deal on, identify any unused subscriptions and cancel them or perhaps you can make more budget friendly choices when it comes to dining out or transport?
Consider how you can reduce your debt ahead of schedule
One of the quickest ways to reduce the cost of your mortgage is by paying it off fast. Cassie, Sydney said ‘We’re looking to sell our investment property in Canberra to reduce our overall debt position. We have our second baby on the way and we just need to control our cashflow. We’re hoping having more equity in our home will also give us better negotiating power with our bank too”. If you do have other investment assets that can be sold to reduce your debt then consider if this is appropriate for you. If you’re not sure, seek advice from a suitably qualified professional like a financial planner. If you have excess income or come into any windfalls consider how you can use this to pay down or contribute it to an offset account as a way to reduce your interest repayments and debt position.
Times are undeniably tough for homeowners facing soaring interest rates amidst other cost of living pressures. However, armed with knowledge and a proactive approach, borrowers can mitigate some of the pain. By reaching out to lenders, negotiating for better rates, assessing the option to refinance, reprioritising spending and finding ways to minimise debt, individuals can regain control of their financial wellbeing. As the RBA continues to bring inflationary pressures down and interest rates continue to evolve, adaptability and informed decision - making will be key. By taking these steps, homeowners can not only weather the storm but emerge from it with stronger financial foundations than before.
Did you miss our recent FREE conversation in which David Koch and Betsy Westcott discussed all aspects of DEALING WITH FINANCIAL STRESS? Watch here