With interest rates rapidly increasing, borrowers are going to be faced with some tough choices and could end up paying 20-40 per cent more than at present.
All four major banks have now pushed up their rates in line with the RBA’s 0.50 per cent increase – and many are tipping another 0.50 per cent rise in July.
With inflation likely to move to 8 per cent before it settles or falls, a Mortgage Choice survey has found that over half of borrowers do not know the current interest rate they are paying on their mortgage and don’t have any idea of what they will do when their fixed-rate loan term expires.
Lendi Group CEO David Human said in a media statement that Australians are rushing to review their interest rates and there has been an increase in activity following the May cash rate rise.
He said: “During the week of the RBA announcement, we saw a 32% increase in the total number of home loan enquires on the Lendi platform1, as compared to the four weeks leading up to the rate rise.
“There are significant savings consumers could make by revisiting their loan and challenging lender loyalty. Combined Lendi and Domain Home Loans data show existing owner occupiers on principal and interest loans who consider refinancing now could save a median of $1,643 annually.”
RateCity provided five options available to borrowers. They can do nothing which on an anticipated interest rate of 5.56 per cent could cost them $95,131 over two years, refix to one of the big four banks’ lowest two-year rates which would cost $76,823 on a rate of 4.17 per cent, renegotiate to one of the big four banks’ lowest variable rates which is expected to rise to 4.32 per cent and would cost $71,340, refinance to one of the lowest variable rates in the market, which is 4 per cent and would cost of $64,204 or refix to one of the lowest available two-year rates, 3.24 per cent which would cost $60,338.
RateCity research director, Sally Tindall spoke to the Australian Financial Review and said: “Variable rates look a lot more attractive than fixed rates right now. However, borrowers should remember these rates are not going to stay low for long.
“The cash rate could rise to over 2 per cent by May next year. People need to factor this in.”
Finder’s home loans editor Richard Whitten says: “The majority of experts in this month’s Finder RBA Cash Rate Survey™ (86 per cent, 24/28) believe that the cash rate will change on Tuesday, while 28 per cent (8/28) believe there will be two cash rate increases before the end of the year.
“Over a third of experts who weighed in (39%, 7/18) say the cash rate will peak at 2.50% or above, with 33% (7/21) agreeing it will peak in early 2023, and a further 38% (8/21) believing it will peak in the second half of 2023.”
Finder’s Consumer Sentiment Tracker in April revealed that 28 per cent of Australian homeowners are struggling to meet their mortgage repayments, and Mr Whitten says that borrowers who are struggling to meet their mortgage repayments should speak to their lender immediately to ease the pain.
The research published by Mortgage Choice in May shows that the best lenders for a $1 million mortgage are Reduce which has an interest rate of 1.94 per cent and PMG and Freedom Lend which both charge 1.99 per cent interest.
Home Loan Experts’ general manager – mortgage broking, Bishal Raj KC says: “When clients come off a fixed-rate period they can consider re-fixing their mortgage to protect themselves from future rate increases.”
Mr Raj warns that if clients do fix their mortgage they should be careful to read the fine print because there may be break fees if they sell their house or pay off the loan and in most cases, they will not be able to make additional payments exceeding $10,000 per annum.
“If they choose to stay on a variable product it’s worth giving a try to re-negotiate the rates with existing lenders or even exploring refinancing options with lenders who can offer competitive interest rates. Those clients who want the benefits of both fixed and variable products can split the loan too,” he says.
Finder’s Mr Whitten agrees that you should look at refinancing to a lower interest rate and gave an example on a $500,00 mortgage. For their calculations, they used the average variable interest rates of 3.23 per cent on a 30-year mortgage and said that if you switched to a more competitive variable rate of 2.20 per cent your monthly repayments would decrease from $2,170 to $1,898.
Home Loan Experts provided a comparison of a split (fixed and variable) mortgage and a standard variable fix.
Another option would be to switch to interest-only repayments temporarily. On a $500,000 mortgage on a 30-year term, your interest rate, with principal and interest repayments has increased to 2.50 per cent, which would cost you $1,975 per month. If that was too high then you could look at interest only repayments which would see your repayments drop to $1,145 so you would save $830. The one pitfall is that if you went back to principal and interest repayments after six months you would have $4,980 in unpaid loan principal and your lender would adjust your monthly repayments further down the track to compensate.
Mr Raj says that if clients are looking to switch to interest-only repayments they need to consider their overall strategy.
He says: “Most lenders need a good reason on why a customer is choosing interest-only (which) is okay for investors but for owner-occupiers they are not really too fond of it, which means you might not get what you want unless it’s a genuine reason and your long term plan makes sense.”
He adds that other facilities such as additional repayments (under the lender’s threshold) and an offset account can help reduce the interest paid on a mortgage for example, if a client pays an extra $100 per month on a $400,000 mortgage with an interest rate of 3.50 per cent they could save over $24,000 in interest over 30 years.
The Mortgage Choice survey found that the lowest two-year fixed rates are with Orange Credit Union (3.19 per cent), BankWAW (3.25 per cent and Police Bank (3.29 per cent).
Eight things to keep in mind before refinancing:
- What are the terms surrounding additional repayments and can you afford the repayments if interest rates increase by up to three percentage points?
- Does the new loan have an offset facility to reduce the interest you are charged?
- What are the fees and charges to switch? How long will it take before you break even?
- Get a breakdown of the terms and conditions including application, settlement and discharge fees.
- What are the cashback deals? Are they worth your while or will they increase the interest you pay?
- How do the terms compare against competitors’?
- What are the terms around “repayment holidays”? Does the lender allow clients to make reduced payments instead of full pauses?
- What customer service does the lender offer? Do they have branches, call centres and internet banking?