How to reduce the financial pain of increasing mortgage repayments

With interest rates rising, so do mortgage repayments – but there are ways to minimise this

How to reduce the financial pain of increasing mortgage repayments


By Mina Martin

The Reserve Bank of Australia increased the cash rate by 0.25 percentage points last week, with banks soon announcing that this would be passed on to their customers. This would mean an extra $68 in mortgage repayments per month on a $500,000 loan.

And with more rate rises on the horizon, this could jump to $567 a month if there is a 2-percentage-point rise, potentially by mid-next year, which would put a significant strain on people’s household finances – but there are some options to keep repayments as low as possible. cited some strategies:

Extend the length of your loan

While not ideal, as it would mean the borrower would pay a lot more in interest over time, extending the length of the loan would reduce their repayments.

“Even the $68 extra a month on a mortgage of half a million dollars becomes an additional $24,450 in interest charges over the life of a standard 30-year principal and interest loan,” The Australian said.

If the cash rate reaches 2.5% (from 0.1% prior to the recent rate rise), this would mean around $200,000 in extra interest charges.

Choice CEO Alan Kirkland said those who have had a mortgage for a long time are almost guaranteed to be paying a higher rate – so it’s time to negotiate.

“You don’t just take the rate that’s on offer,” Kirkland told ABC Radio National. “I can guarantee if you’ve been paying your current mortgage for a while, you will be paying a lot more than new customers. You should go and demand a lower interest rate, and be willing to change business if you really have to, because that can make a big difference.”

According to the Australian Competition and Consumer Commission (ACCC), borrowers with home loans between three and five years old paid on average about 58 basis points (around half a per cent) more than the average rate paid for new loans, reported.

Someone with a home loan of $250,000 could save $1,400 in interest in the first year by switching to a loan with the lower rate – that is $17,000 in total savings by the end of their loan term.

Find other ways to save money

Aside from housing loans, people should also look at their personal loans, credit cards, and other forms of debt that were often at higher interest rates, Annette Morgan, Curtin University tax clinic founder and director, told NCA NewsWire.

“They could consider consolidating all their debts into one or into their housing loan if they have enough equity in their home to do so,” Morgan said. “This of course means you are paying the debts off over a longer period of time, but the benefit is only one payment out per month and at usually a much lower interest rate.”

Morgan also advised people to look at their service providers, including electricity, gas, and various insurance to “see if there are any savings to be made in changing policies or providers.”

Pause your repayments

Borrowers under genuine financial hardship can ask their bank for a temporary moratorium on their repayments to offer them some relief.

“A lot of that happened during the COVID [pandemic], where banks put people’s mortgages on hold, though of course the interest still accrued and the arrears still need to be paid,” Mike Dunkley, Financial Rights Legal Centre financial counsellor, told ABC.

Banks may add arrears to the mortgage on some occasions.

Lock in a fixed loan

People who are extremely risk-averse may opt for fixed-rate loan, instead of a variable, which means their repayments will remain the same, said.

Currently, however, fixed rates are substantially higher (up to 4.99%) than variable rates,which were still as low as 2.19% as of Tuesday morning.

While most experts expect the OCR to increase by two percentage points over the next couple of years, those who lock in a three-year fixed rate of around 5% would be paying higher interest for at least some portion of the life of their loan. But if interest rates increase faster and higher than expected, borrowers could be better off in the long term.

Borrowers may also opt to fix a portion of their loan, and leave the rest as a variable loan with an offset facility so they can put extra money in and reduce their repayments.

Get on top of further rate rises

Further rate rises are expected and this will be felt even more once the cash rate is up around 2.5%.

People who were lucky enough to have already locked in low fixed loans should know they will likely be paying much more once these end, and to consider their future household budget, even putting money aside to ensure the increased payments are not too much of a shock, reported.

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