With the Reserve Bank of Australia (RBA) having just recently raised the cash rate for the first time since 2010, mortgage holders across the country are set to feel the effects. The 0.25% jump (from 0.1% to 0.35%) and the increase in mortgage rates that is set to follow will undoubtedly have many Aussies looking for ways to adjust to the rising charges.
To make things easier for the future ahead, we’ve summarised what Australia’s rising interest rates can mean for you, and compiled a list of 6 things you can do to manage the coming increase.
What the rise in interest rates means for buyers
As major lenders prepare to follow the newly established cash rate of 0.35% by increasing their variable home loan interest rates, buyers can expect to encounter a few changes as they embark on their property journey:
- A gradual reduction in borrowing power is to be expected as lenders look to ensure that borrowers will be able to service higher loan repayments.
- A slowdown in property prices and a lull in demand as more people steer away from paying higher interest rates could make it more affordable for first-home buyers to get on the property ladder.
- Greater loan repayments can mean that landlords will pass these additional costs onto tenants in the form of increased weekly rent, which can have the flow on effect of attracting investors to enter the market.
With the increased interest rates now in place, buyers will have to adjust to the changing landscape of the property market. Here are six ways home buyers can adapt.
1. Review your budget and look for ways to save
It’s always a good idea to track your income and be realistic about where your money is going every month. Give your budget a spring clean by scrutinising every bill and start shopping around for cheaper deals. Can you get a better deal on your electricity, mobile phone plan, private health insurance and other utilities? Do you need multiple entertainment subscriptions on the go at once? Can you order less take away?
The Australian Government’s Moneysmart website has a useful budget planner to help you keep track of where your money is going, and to ask yourself the right questions as you budget. Do I want it? Do I need it? And am I on the best possible plan?
2. Make extra repayments on your home loan
If you are able to, it’s best to make higher repayments than the minimum amount. Even just paying a bit extra every month can have an impact as a smaller loan balance means you don’t have to pay as much in interest! This will help you save thousands of dollars on interest and reduce the duration of your loan. This can be a particularly savvy way of offsetting the added financial requirement that comes with rising interest rates.
But before you start making regular overpayments or occasional lump sum contributions, it’s best to talk to your lender about what conditions might apply. Generally though, variable rate loans tend to allow for extra repayments, whereas fixed rate mortgages may incur break fees.
3. Make more frequent repayments on your home loan
Making more frequent repayments is a simple, yet effective strategy to pay off your mortgage faster. If you switch from monthly to fortnightly repayments, you could pay off your home loan sooner. This is because there are 12 calendar months per year, but 26 fortnights in a year. That’s an additional month’s worth of repayments per year.
4. Add an offset account
Set up an offset account that you can add to your home loan to pay it off faster and with less interest. What is an offset account and how does it work? An offset account links directly to your home loan, essentially acting as a regular transaction account where you can deposit and withdraw your savings and salary directly. The benefit is that any money in the account will be deducted from – offset against – your loan balance, meaning mortgage interest is only charged on the difference. What does that mean? If your loan amount is $500,000, and you have $50,000 in your offset, then you will then only need to pay interest on $450,000.
5. Consolidate your debts
Being free of other financial constraints or debt such as credit cards, car loans and personal loans can also help you pay off your home loan faster. You won’t be able to take advantage of making extra repayments, or lump sum payments if your disposable or extra income is being put towards other debt. Consolidating your debts before you buy a home will also improve your borrowing power when you come to a lender asking for a loan.
6. Save for a bigger deposit
The bigger your down payment is at the start of your loan, the less you will be required to pay off, and the less interest you’ll have to cover over the life of your mortgage. There’s also the potential benefit of greater bargaining power since lenders will often be more open to negotiating a lower interest rate when you have a larger deposit, as this demonstrates less risk on your end.
Are you having difficulty making repayments?
If you’re struggling with your home loan repayments, there is help available through hardship variation. This allows you to potentially change the terms of your loan, or temporarily pause or reduce your repayments. Contact your lender as they will have a hardship team to guide you through the process.
If you’re a homebuyer and want free independent advice, speak to our team of New Home Advisors at iBuildNew on 1800 184 284. Our experienced New Home Advisors can help you shortlist the best options making sure we get the right builder for you. You can also book a call at a time suitable for you!
- We’ll ask the right questions to better understand your needs
- We’ll create a recommended shortlist ideally matched to you
- We’ll answer specific questions or concerns related to home building, land purchasing or financing