PETER LYNCH from 'Really Simple Money', MAY 3, 2022
The recent 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:
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.
Call Catherine (me) at Volare Home Loans on 0411 849 804 and I will do my best to help you.
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.
“If you’re thinking about that, talk to a financial counsellor. It’s free, non-judgemental and all the financial counsellors are trained.”
Message from CAtherine
Occasionally I come across an interesting article to do with Home Loans. I thought I'd share some of these with you here.