How to Deal with a Rising Rate Environment

 

After 2 years of record low interest rates, The Reserve Bank of Australia (RBA) has lifted the cash rate for the third consecutive month. The RBAs latest rise of 50 basis points now puts the official cash rate at 1.35 per cent. All lenders are expected to pass on this rate rise to borrowers which will result in a $500,000 home loan seeing an increase in repayments of $144 per month.

The rise in rates will place added pressure on household budgets, however there are some strategies that can be implemented to manage your loan repayments

  1. Ask the Bank for a Cheaper Rate

The quickest thing you can do is pick up the phone and negotiate with your existing lender to offer a discount on your current variable home loan rate. Before you do this, you want to be armed with the knowledge of competing lender rates as well as your current bank’s rates on what they are offering new borrowers. Remember, banks generally offer sharper rates to new customers so understanding what the going rate is on a similar mortgage is important to negotiating your position.

If the bank isn’t willing to offer a rate reduction, threatening to refinance is the last resort. Given that refinancing can be time consuming and not always an option, many banks assume that most people are too lazy to refinance. Make it clear that if your rate isn’t reduced then you willing to refinance to a different bank offering a better deal.

  1. Refinance

Refinancing to a new bank and taking advantage of a better deal may provide you with a greater capacity to manage repayments. If your existing lender isn’t willing to sharpen your rate, it is then time to compare what other banks are offering.

Before refinancing, it is important to ensure that the benefit in moving lenders doesn’t outweigh the costs. For example, you will need to have at least 20% equity in your home otherwise large Mortgage Insurance fees will incur. Additionally, there are fees and charges in moving lenders so weighing up the interest savings verses these costs is important to figure out if it is worthwhile moving banks.

By talking to a Mortgage Broker who has access to multiple different banks, a comparison can be made against your existing deal to see if the concept of refinancing is a genuine reality.

  1. Access funds in your Redraw Facility or use an Offset Account

A redraw facility allows you to take out any additional repayments that you have made over the required minimum repayments on your home loan. Where you need some extra cash reserves to make repayments, accessing these funds is a good option.

An offset account works differently to a redraw facility whereby this is a separate transaction account that is linked to your home loan. By storing your savings within this account, you will be reducing the interest charged on the linked variable home loan which enables you to pay off your mortgage faster. Holding funds (savings) in your Offset account is a great way to lower your interest bill and ultimately trim years off your home loan term.

  1. Financial Hardship Arrangement

Financial hardship is when there has been a change in your circumstances and you are finding it difficult to make the repayments on your debts when they are due. This is experienced by many in times on illness, unemployment, relationship breakdown, natural disasters or reduced income. The good thing is that every bank has a Financial Hardship Team who are there for support and to map out a plan to manage the repayments. This may take the form of reducing or even stopping the repayments for a period of time so the borrower can get their finances in order to recommence the repayments. Although one might think of the repayments as a ‘holiday’, the interest is still accrued on the daily balance of any loan and you will still have to catch up on your repayments in time.

In the instance where a Financial Hardship arrangement has been made, this will be added to a borrower’s credit report providing a comprehensive picture of the credit worthiness over a period of 24 months. This credit report will alert to events where a repayment has been missed which in turn will lower the borrower’s credit score. Missed repayments don’t just stop at home loans but also extend to other credit obligations such as personal loans, credit card repayments or car loans for example. The good news is that in the instance where a missed repayment incurred and a satisfactory explanation can be made (i.e. moved house and repayment notification was sent to previous address), then you can request a correction and dispute any defaults on your credit file.

The key thing when any Hardship is applied for is to act early. Your bank wants to work with you to solve the problem, so notifying them before you start missing repayments is critical to finding the best outcome.

  1. Other Support

Ultimately, increased costs to anyone’s budget is stressful. Having a mortgage broker proactively manage any of the above with you will ensure you are well supported and taking the right action at the right time. If you think 40 Forty Finance can be of any assistance to you, please don’t hesitate to reach out.

Interest Rate Rises

The Reserve Bank of Australia (RBA) have decided to raise interest rates for the first time in 11 years. This means that for those that have a variable home loan, the rise in rates will have a direct impact on your repayments as all lenders pass on this cash rate hike to borrowers. Traditionally, lenders will take no longer than a week to pass on this increase to their borrowers.

Is a rate rise to your home loan avoidable?

In short, there is no way to avoid a rate rise nor any future rate rises. One option you do have is to fix a portion of your loan. Currently, the interest rate on Fixed loans is higher than variable rates due to banks pricing into the Fixed rate what they predict will happen over the next few years. Fixing a portion of your loan now will provide protection in the event of future rate rises, however doing so will be at a higher rate and therefore increase your monthly repayments. The main benefit of fixing your loan is that doing so will provide a sense of surety and consistency in repayments over the fixed term.

What happens if my home loan is Fixed?

If your loan is Fixed, the rate rise by the RBA will not change your repayments on your fixed loan. We are not recommending any of our clients to break their fixed loan at this time. Rather, we recommend waiting until 1 month before it expires before analysing other options.

Should I refinance to a new Lender?

Different Lenders will pass on rate rises at slightly different times and in different increments so might look like a better rate at one lender today may not be true in time.

Are more rate rises coming?

Yes, there certainly will be more rate rises in the next 18 months. CBA Chief Economist Garth Aird expects the cash rate to rise by 1.15% by the first quarter of 2023 and AMP Chief Economist Shane Oliver is anticipating an increase of 1.4% by the end of 2023. We can also see what the banks are predicting to happen given the average fixed rates for 2 and 3 Year Terms are around 3.5% and 4%+ respectively.

Do rate rises impact my Pre-Approval?

As rates rise, your borrowing power (ability of your income to repay debt) reduces. This means that any pre-approval you have in place will need to be reviewed to ensure the loan amount you are pre-approved for is still achievable. With this in mind, we strongly recommend all clients reach out to us before making any offer or bidding on a property to ensure we review your financial position in line with the current lending conditions.

 

With great movement in the lending space, now is a good time to get in touch with 40 Forty Finance to explore your option on new and existing finance.

Home Loans for Physiotherapists & Podiatrists

Are you a certified and practicing Physiotherapist or Podiatrist and looking to get into the property market?

Did you know that some lenders offer discounts to this group of health professionals when it comes to borrowing money, specifically discounts on Lenders Mortgage Insurance! This is very unique and some banks recognise the stability of these professions and subsequently are happy to waive this often limiting fee for those looking to purchase a property.

What is Lenders Mortgage Insurance?

Lenders Mortgage Insurance (LMI) is an insurance policy taken out by the banks to protect them in the instance that you default on your loan. If you have less than a 20% deposit, or in other words, are seeking to borrow greater than 80% of the value of the property, LMI will incur. It is a once off expense that is paid by the borrower at settlement or is added on to the total loan amount.

Benefits of being a Physiotherapist or Podiatrist?

  • Waived LMI for funds borrowed up to 90% of the property value
  • Save on thousands of dollars for a fee that is only protecting the bank
  • Purchase at a lower deposit without incurring insurance fees
  • Purchase sooner
  • If you intend to purchase a property with your partner, husband or wife, the LMI waiver will apply to the entire application if you are a certified Physiotherapist or Podiatrist

What is the catch?

  • There are only a few lenders that offer this policy per profession
  • Must be a fully qualified Physiotherapist or Podiatrist
  • Registered with AHPRA
  • Working full time in Australia

Case Scenario: Jess – Physiotherapist

Jess is a full-time physiotherapist and has been saving for her first home. She has managed to save $50k

Jess can borrow $441k and the property she has her eye on is worth $490k. This means that she would be borrowing 90% of the value of the house

Usually this would incur an LMI fee of approximately $9k meaning that she couldn’t afford the property

This shows you that by Jess being a Physiotherapist she has just saved $9k in insurance costs

Case Scenario: Sarah & Daniel 

Sarah is a full-time physiotherapist and Daniel is a full time Engineer and they have been saving for their first home. They are in a de facto relationship and have saved $112k. Their dream house is worth $700k

Their combined salaries allow them to borrow $630k which is 90% of the value of the house

Usually this would incur an LMI fee of approximately $17k meaning that they couldn’t afford the property if they didn’t have access to this waiver.

This shows you that although one applicant is a physiotherapist, the LMI waiver policy is still applicable for the entire home loan application

 

Saving money on LMI may very well be the key to entering the property market sooner. The power of having a Mortgage Broker on your side will allow you to find out what is best for your given circumstance. If you are a Physiotherapist or Podiatrist and wish to find out more then get in touch with the team at 40 Forty Finance to run through your options.