The Reserve Bank’s rate rise to 0.35 per cent is expected to hit home loans hardest.

The Australian property market is coming out of a housing boom, in which prices are up around 25 per cent.  The rate rise is expected to put around 300,000 borrowers at risk of default, mostly first time homeowners. 

According to a 7News Australia interview with Hal Pawson of UNSW City Futures Research Centre, the areas most at risk of mortgage stress are the following: 

  •    Toowoomba in Queensland
  •    Campbelltown in New South Wales.
  •    Cardinia, Casey and the Yarra Ranges in Victoria.
  •    Huon Valley and Clarence in Tasmania.
  •    And Swan and Wanneroo in Western Australia.

The Central Bank hasn’t raised rates since December 2010, and with the inflation rate at 5.1, experts believe the RBA has to act. 

So there’s a big possibility that the rates will increase, and to protect yourself from the looming crunch, here are ten things to do: 

 

1. Factor in the rate rise in your mortgage 

Ideally, you should have a plan in place that you can follow if rates suddenly increase. This will help you manage your budget to cover higher mortgage repayments.  If you are in the early stages of taking out a mortgage, you should ask your lender or mortgage broker to help you risk-proof your home loan. Otherwise, you’ll surely suffer from even a small increase. 

2. Ask for a rate review and see a mortgage broker

Once the rate hike is confirmed, you should contact your lender or broker and request a rate review. Lenders are still in tight competition, so you’ll likely get rate reductions if you submit a reassessment. Take this opportunity also to consult your mortgage broker or lender on how you can safeguard your mortgage against future increases.  

3. Look for another lender.

If your current lender declines to reduce your rates, you can apply for refinancing through a new lender. Mortgage refinancing may take some time, and you may have to undergo some processes, but it can be worthwhile if you can secure lower rates. 

4. Switch from variable to fixed rates 

Another way to protect yourself from the sudden increase is to consider fixed-rate mortgage loans.  This option will lock in your repayments for a specific period to help you better manage your cash flow.  But you need to be aware that a fixed rate mortgage has its pros and cons, depending on the movement of interest rates. So be sure to consult your mortgage advisor before you decide to switch. 

5. Overpay when possible 

The looming rate increase could be just the first in a series of credit crunch in the next few years, considering the inflation and the struggling economy.  So if you are capable, it is best to make higher repayments than the minimum amount.  This method will help you save thousands of dollars on interest and reduce the duration of your loan. 

Plus, this will get you in the habit of paying more, so when the interest rate rises again, your cash flow will not be heavily affected.

6. Fix your cash flow

You’ll surely feel the effects of rising rates if your finances are in a mess.  Use this uncontrollable event as a wake-up call to reassess your budget.  Are you earning enough to cover your expenses? Are you spending too much above your means?  Taking time to review how you earn and spend money can help you avoid mortgage default. 

 

7. Find a part-time job. 

With the rise of the gig economy, there are many opportunities to work even in the comforts of your home.  Many Australians are now earning through online work such as writing, digital marketing, graphics design, translation, language tutorials, arts and crafts, and many more. 

Many websites can help you connect with people looking for skilled part-timers. You can use your additional earnings to cover your mortgage and other bills. 

8. Use your home as a source of income. 

Check if you can use your home to generate some income. Maybe you can rent a room to a uni student or offer your storage space for rent.  Some homeowners also use online platforms like Airbnb to rent out their spare bedrooms to travellers.  Just make sure you do your homework and check your local business regulations before becoming a host. 

9. Avoid other forms of debt. 

Even without rates rising, it is still ideal to stay away from unnecessary debt. This includes credit card purchases or deferred payments.  There’s a recent boom in fintech platforms offering buy now pay later plans, making it easier for people to buy expensive gadgets on instalment plans. You can take advantage of these offers if you need to acquire things you need, but if it’s an item of luxury, it’s better to avoid them. 

10. Don’t panic 

While a higher mortgage repayment can strain your budget and certainly cause concern, it’s not an endgame.  Rising rates, high inflation, and oil price hike are part of the economy, and there are many ways to survive and thrive.  We have listed here some of the ways you can try to get by, and you’ll surely get a good plan if you consult a financial planner or mortgage advisor to help you out.

Financial Counselling Australia runs a service, the National Debt Helpline Australia, which has lots of information to help you manage your debt and they also have a telephone number (1800 007 007) that you can call if you’d like personalised advice.

The National Debt Helpline Australia CEO, Fiona Guthrie says: “If you haven’t spoken to your bank it’s worth seeing if you can come to an arrangement that works for you and make sure that it’s affordable.”

She warns that when people are under financial stress they may agree to something that isn’t in their best interests.

Ms Guthrie says that it’s never normally just one thing that causes financial stress. You may have other debts like buy now, pay later, credit cards, utility bill issues or fines you can’t pay.

“It’s hardly ever one thing and what happens in people’s lives is that it’s hardly ever one thing. You may be able to absorb an interest rate rise but then a relationship may break down or you may get ill and if someone gets ill that will be distressing so you focus on that and you ignore your finances.”

She also says that sometimes people lose their jobs, less so at the moment but it can happen.

Her best piece of advice if you are struggling with your finances is to call the National Debt Helpline.

“When you can’t make ends meet people will often get more debt because it seems like an easy way out but you should try and avoid buy now pay later and credit cards.

“If you’re thinking about that, talk to a financial counsellor. It’s free, non-judgemental and all the financial counsellors are trained.”

Disclaimer: This article is for informational purposes only and does not constitute financial advice. Please consult your mortgage advisor before you make any decision involving your mortgage. 

 

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