Updated: Aug 24, 2022
With interest rates on the rise, tens of thousands of Australians are at risk of mortgage stress. If you're one of them, it's important not to panic. As your loan broker, we can help you navigate the situation and come up with a plan.
RBA is battling inflation
Australia is experiencing an interest rate phenomenon that's likely to feel foreign for many borrowers. After more than a decade of interest rates going down, and reaching a record-breaking low of 0.1%, the Reserve Bank of Australia (RBA) is in a phase of interest rate rises.
The rate rises are designed to arrest inflation. Inflation describes price rises over a given period of time. Ideally, the RBA would like inflation to sit at around two to three percent, whereas it's currently sitting at 5.1 percent and likely to rise further, according to the Federal Treasurer.
By raising interest rates, the RBA hopes to reduce the amount of spare cash we have in our pockets. Economic theory says that, as we tighten our belts, lower demand will exert downward pressure on prices and bring inflation back to target levels.
Consecutive interest rate rises
The first recent interest rate hike occurred in May 2022, followed by three more consecutive rises in June, July and August. The official cash rate is now sitting at 1.85%, with more increases expected. (We'll keep this article updated as the situation develops.)
The following table shows Australian interest rate movements since 2004. The official interest rate averaged 3.86 percent from 1990 until 2022, reaching an all time high of 17.50 percent in January of 1990 and a record low of 0.10 percent in November of 2020:
Source: Trading Economics
What does this mean for borrowers?
Let's take a look at how the recent rises affect mortgage repayments. The figures below show the monthly increase in variable rate monthly repayments since the RBA first lifted rates in May:
$500,000 mortgage balance = an extra $472 per month
$750,000 mortgage balance = an extra $708 per month
$1,000,000 mortgage balance = an extra $944 per month
To model how your loan repayments could change with future interest rate movements, use our online Loan Repayments Calculator:
Use our online Loan Repayments Calculator or contact us to help crunch the numbers.
Mortgage stress game plan
If you're feeling the pinch or worried that your mortgage payments are going to stretch your wallet in future months, there are a variety of strategies we can help you explore.
Before we jump into the list, it's important to point out that, aside from panicking, the next worse thing you can do is ignore your financial problems and hope they go away. Hope, as they say, is not a strategy. It's never too late to take control, but you'll be in a stronger position if you explore your options before you've missed a loan payment.
Chris (left) and Greg (right) discussing a client's situation. It doesn't matter if you're an existing client - we're here to help everyone.
1. Don't panic
Since October 2021, lenders have been required to assess new borrowers’ ability to meet their loan repayments at an interest rate that's at least 3.0 percentage points above the loan product rate. This means that recent borrowers have been approved for their mortgage with a built-in serviceability buffer. Unless your financial position has significantly changed, you should have capacity for a series of rate rises. If you can afford to, pretend your loan is already at a higher rate and adjust your payments now.
2. Switch to a better suited loan
On the other hand, if you suspect you’re paying too much for your home loan, this could be a good time to switch lenders. Interest rate volatility increases lender competition, which makes it a good time to look for a better, cheaper deal. We'd be pleased to help you compare products and lenders.
3. Create a budget
If refinancing isn't an option, I suggest making a budget to better understand where your financial pressure is coming from. In many cases, mortgage payments are only part of the picture.
Start by printing the last three to six months of your bank and credit card statements. You're going to use this information to create a budget. Open a spreadsheet or use our free online Budget Planner (or a piece of paper and pencil works, too) and start organising your budget into 'income' at the top of the sheet, and 'essential' and 'non-essential' expenses underneath.
Your essential expenses include items like groceries, petrol, mortgage, car loan, medicines, insurance - the stuff that keeps healthy food on the table, the lights on and a roof over your head. Every other expense is non-essential.
Use our free online Budget Planner to get a clear picture of your finances.
How does your budget look? Where is most of your money going? How much of your income is taken up by mortgage and other loan payments? Are you overspending in any areas? (I say this as someone who's guilty of spending a small fortune on bike parts, Star Wars collectibles and aquarium fish!)
Most people have non-essential expenses they can cut back on - underused gym memberships, streaming services, takeaway food, (Star Wars figurines), and so on. If you have enough wiggle room in your budget, start budgeting for further interest rate rises now and put the extra money into an offset account, a redraw facility or a special savings account.
4. Contact your lender
On the other hand, your budget may reveal a more serious predicament. If your cash shortfall is short-term, don't hesitate calling your lender to ask for a payment extension before the due date.
Some financial predicaments, however, are not short-term. If your financial situation has significantly changed (eg. job loss, relationship breakup etc.) and you don't have enough income to cover your bills and repayments, this is called 'financial hardship.'
Under Australia's credit laws you have rights when you are in financial hardship and your lender is obliged to offer you appropriate support. The types of support are laid out very well in this Financial Rights Legal Centre fact sheet.
In short, financial hardship arrangements are designed to provide relief while you assess your options or get back on your feet. There are no hard-and-fast rules, which means you can also propose your own arrangements.
This is where the budget you created at step 3 will come in useful again. Use it to work out what sort of arrangements are affordable and never commit to a proposal unless you're absolutely confident you can meet its terms.
5. Get back on track
Financial hardship arrangements are generally not a panacea in themselves. They provide breathing room while you remedy the situation (eg. find a job) or give you time to assess your options and come up with a plan, such as refinancing, debt consolidation, selling some assets etc.
Please don't hesitate to contact us if you find yourself in any of these situations. When you're in a financial hard spot, it's easy to get lost among the trees. As independent loan experts, our job is to help you see the forest and navigate your way through it.
Whatever your situation, please don't hesitate to get in touch with our team. We're here to help and serve!