The RBA’s 11th rate rise since May 2022 has everyone worried about their loan repayments. The central bank has been accused of playing recession roulette, but the RBA argues that rate increases are required to smash inflation – which, as of May 2023, is at 7%. The RBA’s target rate is 2-3%.
What Happens When Interest Rates Rise?
The direct effect of a rate rise is on your monthly repayment. When the cash rate goes up, most banks will raise your interest rate, too. For a $500,000 home loan, an increase of 0.25 percentage points would add about $80 to your monthly repayments.
The impact may be particularly heavy for those coming off low fixed-rate terms that began in 2020 or 2021. They may be facing an interest rate more than 4 points higher than their fixed rate. On a $500,000 home loan, that could mean an additional cost of about $1,325 in their monthly repayments.
If you cannot cope with your repayments and cannot refinance to a different lender, you could end up as a mortgage prisoner.
How To Deal With Rising Interest Rates In 2023
If you are proactive, you can take steps to mitigate the impact of the interest rate increases so you stay on track with your repayments.
Let’s go through seven strategies you can adopt to deal with rising interest rates.
1. Review Your Budget
Take a close look at your income, expenses and debts to determine where adjustments can be made to accommodate higher repayments.
Start by examining your income sources, including your salary, any investments or rental income, and any other sources. Then, make a list of all your expenses, including rent or mortgage payments, utilities, groceries, transport, insurance and any other regular bills or payments. You may also want to include discretionary spending, such as dining out, entertainment or hobbies.
Once you have a clear picture of your income and expenses, identify areas where you can cut back or make adjustments. For example, you could reduce your utility bills by cutting back on energy usage or finding more cost-effective providers. You may also be able to save money on groceries by meal planning or buying in bulk.
With every cash rate hike, more of household income will have to be devoted to paying the mortgage. So, it’s crucial for homebuyers to review their budget and identify areas where they can reduce expenses and free up additional funds for mortgage repayments.
2. Negotiate With Your Lender
You could miss out on a lower interest rate by not talking to your lender. If you are coming off a fixed rate, you could be rolling onto a higher variable interest rate than what your lender is offering new borrowers. If you talk to your lender, they might offer a lower revert rate to retain you as a customer.
You can take the help of a mortgage broker in negotiating a lower interest rate from your current lender. At Home Loan Experts, our Post-Settlement Team will inform you about the revert rate that you would transition to and plan the next step.
3. Refinance To A Lower Interest Rate
If your lender is not willing to offer you a competitive rate, look at other lenders that will. There are currently many lenders offering cashback rebates when you refinance with them (through the end of May). Keep in mind, however, that lenders offering higher rebates may not give the lowest rate. Decide what your financial goal is and work with a mortgage broker to get refinancing options that suit your needs.
It’s important to keep in mind that even if you are a homeowner who is unable to refinance at the moment, there may be options available to you in the future as your financial situation improves.
Our experienced brokers can provide assistance with refinancing options, helping borrowers get more competitive interest rates and monthly repayments, consolidate debts or access equity in their homes. Contact us today at 1300 889 743 or fill out our free online assessment form and we’ll get back to you.
4. Make Extra Repayments If You Can
When interest rates rise, the amount of interest charged on your home loan also increases, which makes your monthly repayments more expensive.
By making extra repayments now, you lower your principal more quickly, reducing the amount of interest charged on your home loan and also paying off your loan faster, which means you’ll be less affected by future rate hikes. Depending on the terms of your loan, you may be able to make extra repayments without penalty, which can save you even more money in the long run.
5. Extend The Loan Term
By spreading the cost of the loan over a longer period, you will decrease your monthly payments. However, this also means paying more interest over the loan’s lifespan.
Before deciding to extend your loan term, carefully weigh the pros and cons. While it can help with cashflow in the short term, it may result in paying more in interest in the long term. Furthermore, keep in mind that extending your term means paying interest for a longer period.
If you are considering extending your loan term, it’s important to speak with your lender to understand the implications of doing so and to see if it’s the right decision for you. They will provide information on how extending your term will affect your repayment amount and total interest paid.
6. Get Home Loan Features Like An Offset Account Or Redraw Facility
An offset account or redraw facility can help borrowers save money by reducing the amount of interest they pay on their home loans.
With an offset account, any money in the account is deducted from the outstanding balance of the home loan when calculating your monthly interest payment, reducing the interest charged on the loan.
With a redraw facility, borrowers can make extra payments on their home loan and then redraw those funds if needed, which can help to reduce the outstanding balance and, therefore, the interest charged. Borrowers can potentially save thousands of dollars over the life of their home loan, which can be especially helpful in dealing with the impact of rising interest rates.
7. Fix Your Home Loan
Fixing your home loan can be a good strategy for managing rising interest rates. By locking in a low fixed rate, borrowers can avoid the risk of further rate hikes and potentially save money on their mortgage repayments. Knowing exactly how much you need to pay each month can help you budget and plan your finances better.
Do not hastily make that decision, though. Do your research and make sure you consult with a mortgage broker so that you understand the potential risks and benefits of fixing your loan.
How High Will Interest Rates Go?
ANZ has increased its forecast for a peak in the cash rate to 4.10% since the RBA increased it from 3.6% to 3.85% in May. The rest of the major banks have not announced changes in their cash rate forecasts.
Here are the Big Four’s cash rate peak predictions, following the RBA’s May 2023 announcement:
- ANZ – 4.10%
- CBA – 3.85%
- NAB – 3.85%
- Westpac – 3.85%
Note: These forecasts are subject to change.
Prior to the RBA’s May rate increase, experts had expected one more rate rise before it peaked. However, in his statement on monetary policy following the rate hike, Governor Philip Lowe warns of further rate rises stating that, “Some further tightening of monetary policy may be required to ensure that inflation returns to target in a reasonable timeframe, but that will depend upon how the economy and inflation evolve.”
Are you anticipating changes in your mortgage? Don’t let interest rate rises catch you off guard. Use our interest rate rise calculator to calculate your monthly payment after an increase and plan for the future.
We Can Help You!
If you’re worried about the impact of rising interest rates on your home loan, take steps now to protect your finances and stay on track with your mortgage repayments. Our experienced Home Loan Experts can assist you with refinancing options, potentially lowering your interest rate and monthly payments, consolidating debts, or accessing equity in your home. Contact us at 1300 889 743. Don’t have time for a call? No problem! Fill out our free online assessment form to get started!