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In April last year, Australia’s cash rate was at an historic low of .1%, many home loan interest rates started with a two, and the term ‘mortgage cliff’ was rarely mentioned.
Fast forward a little more than one year, and Australia’s home loan landscape looks vastly different: the Reserve Bank of Australia Board has hiked rates 12 times since May to a fresh high of 4.1%, and there are some 800,000 home loans, totalling $350 billion, facing a ‘mortgage cliff’ this year when they roll off a fixed interest setting to a higher variable rate. The first first tranche of fixed rate loans are expected to end in July.
It is estimated that homeowners with an average $500,000 loan are now paying $1,200 extra a month in interest alone than they were this time last year.
To make matters worse, the RBA has flagged further interest rate hikes to bring inflation to heel, while gas and electricity companies are warning of steep increases in bills this winter owing to Russia’s invasion of Ukraine.
For borrowers feeling the pain of rate hikes, here are five steps you can take to ease the pressure on your hip-pocket.
1. Ask Your Bank to Lower Your Interest Rate
Many mortgage holders have been watching their mortgage repayments climb each month in the mistaken belief there is nothing they can do about it.
While Australians have no control over the decisions of the RBA board at its monthly meeting, we can, however, contact our banks and insist on a better deal.
The best way to do this is to phone, rather than email, the home loans team. Once you are connected to a home loan specialist, ask the representative to lower your rate. Lenders make money off our unwillingness to phone and ask for a lower rate—it’s known as the ‘mortgage loyalty tax’—and often entice new customers with much better rates than those for existing customers.
When you are speaking to your lender, make sure you have researched both the entry-level interest rates for new customers as well as their competitors’ rates.
It’s important to have these figures on hand so that you can request your rate be lowered to match their introductory offer or the rates of their competitors. The longer you have been with the bank, and the better your credit history, the more likely the bank will grant your request. Aim for a .7% reduction in your rate, which may mean asking for 1% off and then offering to settle at .7%.
When you are speaking to your lender, make sure you have researched both the entry-level interest rates for new customers as well as their competitors’ rates.
If the bank or lender offers anything less than .5%, then it is worth pushing for more by citing your loyalty, regular payment history and willingness to switch lenders for the best deal.
Borrowers with the most bargaining power are those who have:
- Been with the lender for a number of years and have a strong track record of paying off the loan each month
- A history of making additional payments
- Secure, full-time employment for at least 12 months
- A low loan-to-value ratio, or LVR, on their loan—in other words, there is a lot of equity in the home
- A healthy credit score
- Been living in the property, rather than renting it out as an investment
You may wish to use the following script: “I have noticed that X bank is offering X interest rate and as a loyal customer with a history of repaying my mortgage on time, I would like you to match that.”
The home loan specialist may agree to the lower rate, but then wish to impose a refinancing fee. Hold your nerve, and politely insist this charge be waived (yes, they can do this). Why should you pay for successfully negotiating a lower home loan rate?
2. Refinance your Home Loan and Make the Switch
There are occasions when a bank will fail to match your request to lower the rate or they offer a meagre discount that leaves you with the impression they don’t value your business.
In this instance, it may be worth refinancing your loan by switching to another lender with a much more competitive rate.
Refinancing can be expensive, so it’s important to weigh up the overall benefit of the lower rate and how long it will take for the refinancing to pay for itself once you have factored in costs. If you only have a short time left on your mortgage, then refinancing may not be worth it. Keep an eye out for lenders that are offering cash-backs of up to $5,000 to lure new customers and help them offset the expense of refinancing, and take note of the comparison rate to ensure the loan is as good as it sounds.
Refinancing is a time-intensive process, so it may be best to chat with a mortgage broker who can do the research on the best home loan products for you. They can also help you to arrange the correct documents and deal with the bank on their behalf. Brokers spoken to by Forbes Advisor have indicated that they are run off their feet with refinancing requests, with one broker receiving triple the amount of calls than usual.
Mortgage brokers usually don’t charge for their services in Australia—they receive an upfront commission from the bank and then a monthly trail commission for the life of your loan—so make sure the broker you work with can offer a wide range of home loan products and not just loans from lenders that offer them the best commissions.
You can opt for one of the big mortgage franchises, such as Aussie Home Loans, Mortgage Choice or RAMS Home Loans, or choose a boutique broker, such as Mates Rates Mortgages.
Mates Rates mortgages are a little different in that they make money by keeping the upfront commission at a capped amount—anything above that amount from the lender is refunded to the customer—and then redirecting the monthly trail commissions to mortgage holders. The business model has (understandably) garnered rave reviews on independent consumer review site, Product Review.
Related: How to Refinance Your Home Loan
3. Ask for Help
Speaking after the June rate rise, Australian Banking Association chief executive Anna Bligh warned that while they have not seen a material increase in customers defaulting on mortgage re-payments, she thinks tough times are on their way.
“If we were to see either another increase or the current rate stay at this level for a prolonged period of time, then banks are expecting that they will see more customers entering into formal hardship arrangements in the second half of this calendar year,” she said.
If this is you already then contact your bank directly and speak with the lender’s hardship team. Each lender has a dedicated hardship team that is legally required to help you if you are struggling with your mortgage repayments.
The bank may be able to place you on a hardship option, which could include a freeze on repayments, or a cheaper loan option with a lower interest rate. After reviewing your loan and your financial situation, they may opt to fix part or all of your home loan or they could add to your loan term—taking a 25-year mortgage to a 30-year one, for example—which will make monthly payments cheaper. You can shorten the loan term again when you’re in a better financial position.
As CEO of National Australia Bank, Ross McEwan, told ABC Radio National earlier this year, the earlier customers contact the hardship team, the more options available to them.
“When people ring or email our hardship team, within 90 days… 90% of them are back in good shape again,” McEwan said.
If you wait until you are in arrears on your home loan, then your credit score could be affected, which may have ramifications on other loans you attempt to take out down the track. If, however, you get on the front foot and ask for a repayment holiday then it won’t affect your credit score in the long term: there will be a note attached to your report that you’re under a financial hardship agreement, but this will disappear after 12 months.
But make sure you take out any funds for other necessities from your loan account before you contact your bank or it may appear you have more money than you actually do.
4. Revisit Your Budget
Of course, another way to indirectly tackle the rising costs of mortgages is to find extra money by revisiting your budget and cutting back on expenses.
As a first step, you can download one of the recommended budgeting apps from our Forbes Advisor guide to Best Budgeting Apps for Australians, which will help you shed light on where you are spending money and where you may be able to cut back.
You may for example conduct a paid subscriptions audit to identify direct debits you no longer use or need—such as a lapsed gym membership or neglected streaming service—and set monthly financial goals that the app can help you track.
There is no doubt that groceries have become more expensive over the past year, and there are myriad ways to keep a check on your spending, including buying in bulk, buying home brand store items, opting for cheaper cuts of meat, and using loyalty programs, such as Flybuys, to access member discounts.
If you have trimmed the fat from your budget, and are still struggling to make ends meet, then another option is to increase your wage. You can, of course, take your case to your employer for a salary increase, or you can add a side hustle to make extra money on the side.
According to ABS statistics, the number of people holding more than one job is at a record high in Australia, with 925,000 people reporting a side hustle. For some this will involve leveraging their professional skills to freelance or consult on the side, while for others it will mean tapping into the share economy to rent out their spaces, pet sit for holiday-makers or become a driver for a share-riding app, such as Uber. You can read our guide to the Best Side Hustles in 2023 for more ideas on making money in your spare time.
5. Seek Financial Counselling
Perhaps, the mortgage rate rises have become part of a bigger financial problem, exposing you to a financial shortfall that has spiralled out of control.
Perhaps you have been coping with the rate rises and inflationary pressures by maxing out your credit card or going into serious debt. If so, you are far from alone.
Call volumes to the National Debt Helpline rose from 16,765 calls to 21,617 over January and February. To put this into context, that is an increase of 29% compared with the same period last year.
The National Debt Helpline can be a lifeline for many struggling Australian families. It is free, confidential and completely independent: they do not sell products and all of their staff are trained financial counsellors who can advise you of your options, as well as your rights.
If your matter is more complex, the staff can refer you to an in-person appointment closest to you.
You can phone the National Debt Helpline on 1800 007 007 or visit their website.
Frequently Asked Questions (FAQs)
What happens when interest rates rise?
When the RBA meets on the first Tuesday of each month, board members decide whether to raise, lower or hold the cash rate steady. Over the past 10 meetings, the Board has opted to raise the cash rate from the historic low of .1% in April of last year to 3.6% as of March, 2023. This signals to banks and lenders that they are in a position to raise their commercial interest rates, which are usually at least 1% higher than the RBA’s official cash rate. As a result, mortgage holders face higher interest repayments on the interest portion of their loan, and if these rises are sustained, can place considerable stress on household budgets. This results in families winding down their discretionary spending, and therefore, so the thinking goes, demand reduces in the economy and inflation subsides.
What happens if you can’t pay your mortgage?
If you are in the situation where you are struggling to pay your mortgage, then contact your bank or lender before you head into arrears. The bank’s hardship department is legally obliged to help you with your mortgage repayments if you’re struggling, which may involve freezing your repayments for a time being or lowering your interest rate.
How to keep your repayments down?
There are many ways to keep your repayments at a manageable level, and these include asking your bank for a lower interest rate, refinancing your home loan, making use of an offset facility to reduce the amount you pay on the interest portion of your home loan and fixing your home loan for a set period of time. You may even opt to request that your loan be switched to an interest-only product, which will mean that instead of paying off the principal as well as the interest, you are only paying off the interest portion. This will naturally extend the life of your loan, as your payments won’t be chipping away at the principal debt, but it could be a short-term solution to buy yourself some breathing room.
What is the best interest rate?
While, there is no doubt that most interest rates are above 5%, there is the odd exception. As of Mar 20, 2023, Bendigo Bank was offering an express home loan, with principal and interest at 4.97%.
