Four essential tools to survive the shock home loan hikes

The Reserve Bank’s 0.5% increase on the official interest rate has now been passed on to homeowners by all four of the big banks.

It’s the third consecutive month we’ve been hit so hard to curb inflation, and the fall out for hard-pressed families already struggling thanks to rising prices will be dire.

The floods will be another factor in pushing up prices – so those $12 lettuce could look cheap if all these factors continue to collide.

If all the rise is passed on, it will add $333 to monthly repayments for a  $500,000 mortgage, $499 for a $750,000 mortgage, and $665 for a household with a $1 million loan, according to RateCity.

Young first-time buyers are likely to shoulder the most pain. ABC business editor Ian Verrender says: “It’s the first-home buyers who got in last year who are the ones who are … looking at quite a lot of angst in the future here.

“While a lot of them are on fixed rates and they probably don’t run off for another year or two, they’re looking at huge increases in their repayments once those fixed rates roll off.

“The younger you are and the more recently you’ve gotten into the housing market, the more extreme the pain is going to be.”

Shane Oliver, AMP Capital chief economist, said further rate rises would trigger house price falls of up to 20 per cent nationwide.

“We’re just at the beginning of interest rate rises, so there’s more to come, which means more falls in prices,” he predicted.

“Buyers’ capacity to pay is dwindling rapidly, at the same time confidence is collapsing as a result of higher interest rates talk. As property prices start falling, it feeds on itself. So, we’ve got falling prices feeding weak demand.”

Adelaide-based Mortgage Choice broker, Chris Longwill says to prepare for future hikes, homeowners should start paying the higher rate now.

He says: “What I would suggest is to start paying the increased rate in your repayments, so if your interest is 3 per cent and you think it’s going to go up to 5 per cent then work out the difference and start paying that now.

“As an example, if your repayments are $2,000 a month and you expect them to jump to $2,500 start paying that now”.

Mr Longwill advises homeowners to avoid using their redraw facility so that they can build a buffer and if anything happens you are prepared.

He says that homeowners shouldn’t use a redraw facility as holding equity.

“It is an account that holds funds paid as extra repayments against your home loan. Also used for savings accounts ie. $50,000 in savings should be put against your mortgage. which will then be available in redraw, you then don’t pay any interest on that 50k,

“It works identically to an offset except it is part of your home loan, not a separate bank account with card access like an offset account is.”

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He says that if you forgo the $50,000 against the redraw account when refinancing, and use it to pay down your mortgage then you won’t have access to it anymore, but your loan will be $50,000 less, so you’ll have lower repayments and more equity.

That will make any interest rate increase less painful.

If the worst-case scenario happens and the repayments get too high then ask your broker or lender to do a health check on your loan to ensure you’re on the most competitive rate.

With inflation predicted to soar to seven per cent at the end of the year, it’s not looking like a white Christmas – more like a sea or red ink.

The RBA was unapologetic. Far from it.  “The Board expects to take further steps in the process of normalising monetary conditions in Australia over the months ahead.”

The markets say we’ll be at a three per cent cash rate by the end of the year, with another half a percent by next May.

The only good news is the bank predicts a fall back to 2-3 per cent next year.