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
- 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.
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.
- 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.
- 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.
- 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.