Most Canberran homeowners have never experienced an accelerating interest rate environment like that of the past eight months and, despite this month’s pause, some signs point to interest rates continuing to rise.
How can homeowners prepare for further hikes, what can they do to ease financial stress, and how should they approach negotiating better rates?
RSM Financial Services Australia financial adviser Chris Oates suggests Canberrans adjust their budgets now to avoid getting caught out later.
“There are about 800,000 fixed-rate home loans out there currently sitting on interest rates around two per cent that will roll over to variable rates between March and December 2023,” Mr Oates says.
“Let’s say you have a $600,000 mortgage paid monthly with a two per cent interest rate. Your repayments are probably around $2250 a month. If rates go up to 5.5 per cent, repayments jump to $3400 a month.
“That’s an extra $1150 that you need to find every month to pay your mortgage – it’s a huge hit to any household.”
A harsher financial environment requires easing into, and Mr Oates says the key to successful adjustment is getting used to putting a higher amount away each month while your budget is still flexible.
Paying off your mortgage fortnightly could also be helpful.
“A fortnightly approach equals 26 payments throughout the year instead of 12, more than doubling the number of times you pay money into your mortgage,” Mr Oates says.
“Most banks only charge interest once per month. If you make two repayments in that time, you essentially have one payment interest-free.
“Based on a $600,000 loan at 5.5 per cent interest, paying fortnightly could save you $80 a month.”
Canberra’s Clarity Home Loans managing director Mark Edlund says there are several short-term strategies to reduce overall monthly payments.
“One option is consolidating smaller loans, like those for your car or credit card, into your home loan,” Mr Edlund says.
“The trade-off is that you could potentially pay more interest on those consolidated debts in the long term, but your monthly repayments will be more manageable upfront.
“For those in a really dire financial position, there is the option to pay interest only, instead of principal and interest … This is far from ideal as you won’t be paying your debt down, but it can reduce your monthly payments significantly as a last resort.”
When searching for a better deal, Mr Edlund says it’s important to touch base with an independent, non-commission mortgage broker who can negotiate with banks on your behalf.
“The marketplace today is highly aggressive,” Mr Edlund says.
“Banks are trying to attract customers by offering competitive refinancing, but you need to figure out whether the package that you’re refinancing to is really worth it.
“Are you actually going to be saving over your existing product when factoring in potential refinancing costs? Sometimes this can be tricky to understand, which is why engaging a professional is so valuable.”
Visit Clarity Home Loans for more information or advice on your current home loan.
If you’d like to review your financial plan, contact RSM Financial Services Australia or visit its Canberra office.