Home loan CEO reveals: How to manage predicted mortgage rate rises
New Finder research reveals that an out-of-cycle interest rate rise could plunge 150,000 Aussies into mortgage hardship.
The nationally representative survey of 597 Australians with a home loan revealed that 1 in 20 (5%) would require financial assistance if their home loan rate went up.
Around 53% of borrowers, equivalent to 1.5 million people, said they would try to negotiate a lower rate with their current lender.
And a further 1 in 4 (25%) confirmed they would try to refinance to another lender, if they were hit with an out-of-cycle rate rise.
9News reports on the latest Finder research, sharing insights from Finder home loans expert Sarah Megginson that thousands of Australians are vulnerable to rate rises.
The bottom line is: People are no longer prepared to pay more than they need to for their home loan.
It's likely to be a little while before the RBA officially lifts interest rates, though many banks and lenders are increasing fixed or variable mortgages on their own.
Fortunately, there are things you can do about it now to prepare for a potential rate hike on your mortgage.
First things first: When are mortgage interest rates set to increase?
No-one knows for sure, of course. But Walsh made an interesting point about the price that current mortgage holders are paying, in anticipation of future market movements.
"While Aussie home loans are enjoying unprecedented low interest rates, economists are now in a frenzy of speculation as to when the RBA will ultimately begin to raise rates. Many lenders are already hiking the cost of fixed rate loans and to hedge for that rise, so in a sense, fixed rate borrowers are having to pay the cost of potential future rate rises today," said Nathan Walsh, co-founder and CEO of Athena Home Loans.
The official word from the RBA is that the cash rate won't increase until 2023 at the earliest.
But, some banks are lifting rates anyway. Just last week, Westpac increased its 4- and 5-year fixed home loan rates by 0.30%, which is 0.05% more than an RBA rate rise.
The new rates for an 80% LVR, principal and interest loan on Westpac's Premier Advantage Package are:
|4-year fixed||5-year fixed|
|Owner occupier||2.59% (up from 2.29%)||2.89% (up from 2.59%)|
|Investor||3.09% (up from 2.79%)||3.09% (up from 2.79%)|
At the same time, Westpac also cut the introductory rate on one of its variable home loans by 0.20%.
The bottom line: There is a lot of volatility and price movement in the market right now, which is why it pays to be proactive about making sure you're not paying too much.
How to prepare now for a future home loan hike
To manage impending rate rises, start planning for future increases now. Do this by working out how much your mortgage would cost with a 0.25% increase, and if your budget allows it, start making that extra repayment now.
On a $600,000 principal and interest mortgage with an interest rate of 2.5%, an additional 0.25% in interest would add $80 per month to your repayment, or roughly $20 per week.
If you start paying that extra $20 per week now, you'll be "stress testing" your mortgage to make sure you can afford a future rate increase, plus, you'll make extra headway on your loan. Keep up an extra $20 per week for the whole loan term, and you'd save almost $12,000 in interest, and own your home outright 1 year and 3 months sooner.
Also, start shopping around now for a better deal
If it's been 12 months since you last checked in on your mortgage, then now is the time to shop around.
Our own Kate Browne did a little experiment with her own mortgage to find out just how hard it is to refinance your home loan. Her experience won her a small financial windfall, in an upfront cash bonus plus life-long interest rate savings:
Just one thing to be mindful of when you're looking for a cheaper home loan, if you end up looking to lock in a low-rate fixed mortgage: Ask about all the fees, charges and conditions upfront, Walsh warns.
"Borrowers need to be more careful than ever when it comes to fixed rates," he said.
"Of course, headline rates are only part of the story and Aussies should look carefully at the comparison rates of fixed rate loans, which are often much higher."
A high comparison rate is "a warning sign that there may be hidden fees and the interest rate jumps over the life of the loan", he added.
"This is a real trap for the unwary, and could result in borrowers paying tens of thousands of dollars in excess interest over the life of the loan," Walsh said.