Time to read : 1 Minutes
Australia's cash rate has risen by 1.75% since April and banks are expecting another increase when the Reserve Bank meets on 6 September.
One group of homeowners who will really feel the pinch are people who took advantage of cheap one or two year fixed rate mortgages when rates were at a record low.
Compare Club Mortgage Broker Sophie Matthews says people who have a mortgage rate of 1.99% or lower that's about to expire should remain calm but be ready to act quickly.
"Don't panic – even though rates are increasing – now is the best time to look to speak with a qualified professional to support you with refinancing your home loan."
What you need to know
The Big Four Banks - Commonwealth, ANZ, NAB and Westpac - are all predicting that interest rates will continue to climb until February or March next year.
40% of Aussies homeowners are coming off a fixed rate mortgage in the next year – that's a lot of financial shocks.
According to the Commonwealth Bank, $25 billion worth of home loans will expire by the end of 2022.
Last October regulator APRA told banks to factor in a 3% serviceability buffer. That means if you lock in a fixed rate of 4.99% today for 25 years on a $600K mortgage, you will be stress tested at 6.99 or 7.99% rate.
Instead of paying $3,504 a year at 4.99% on a $600k mortgage, lenders will calculate your ability to pay 7.99% or a whopping $4,626 a year
The reason that rates are rising – and will continue to do so – is that the RBA's job is to control inflation. Which essentially is to keep a lid on prices of everyday items, and stop us having to pay silly prices for our iceberg lettuce.
Be aware: Switching lenders for a better rate may be tricky, especially if you no longer pass the borrower stress test. In a nutshell, banks do a calculation on much you can afford to repay.
What can you do?
Sophie Matthews reiterates not to panic but speak to both your bank or broker and find out what your options are.
Know when your current fixed rate expires. It can take around three months to sort refinancing and Sophie suggests considering your options at least six months out.
Somebody who rolls out of 1.99% fixed rate mortgage and into a 4.99% variable on a 25-year $600K mortgage will suddenly be paying an extra $999.84 a month overnight.
Proactively look for a better rate. Tara, a Compare Club member, recently swapped her 4.44% variable rate for a better deal of 3.59% (no-frills variable) at the same bank.
"It was really easy to do, and I just saved myself hundreds of dollars from a quick five minute call to my broker."
Build a buffer. Many brokers and banks are advising people on low rates to overpay if they can afford it, as it'll make the transition to a higher rate less painful.
Get help: if you are struggling and speak to your bank or broker. Moneysmart recommends applying for a hardship variation to help get through tough times. Remember to reach out to family and friends for support too, or call Beyond Blue.
Bottom line
Mortgage holders in Australia are starting to really feel the financial squeeze but there is a lot that you can do. Shop around, get advice from your broker and be nimble.
Sophie says,
"There are heaps of good rates at the moment, with potential to combat advertised rates hence why you should speak to a professional. There's rate on our panel as low at 3.74% today.*"
* correct as of 24/08/2022
