The home loan interest rate grenade is set to blow for many borrowers this year, especially as the Reserve Bank of Australia (RBA) confirmed that two thirds of fixed rate loans are due to expire by the end of 2023.
But rate rises are just the tip of the iceberg as homeowners face being hit with even higher costs with the cost of groceries, fuel and energy all soaring.
It comes as Compare the Market’s latest research revealed just one-in-three Aussie mortgage holders have tried to negotiate a lower rate in 2022.
The age groups that were more inclined to negotiate – were Zoomers (41%), Millennials (41%), followed by Gen X (36%). Of those surveyed, the largest group that said they haven’t asked for a lower rate were Boomers II (69%) and Baby Boomers+ (97%).
Despite only 31% of Boomers II asking for a lower rate, more than 73% were triumphant. But ultimately the millennials (25-34 years olds) were the best negotiators with more than 77% succeeding.
Compare the Market’s General Manager of Money Stephen Zeller said those with a locked-in rate due to expire soon should really be starting to have negotiations with their lender to secure the best rate available.
“All in all, almost 70% of those that did talk to their lender, said their rate discount negotiation was successful,” Mr Zeller said.
“You’ve got to try. The worst that can happen is that you try and miss out, so you may as well give it a crack and see. Besides, the odds are in your favour there’s only a 30% fail rate according to our research.
“If you’re complacent and don’t ask, or you don’t shop around for a better rate, you’re really doing yourself a disservice and will likely end up wasting thousands of dollars in extra interest over the life of your loan.
“Borrowers with locked in rates that are due to expire this year face a minimum increase of at least 40% to their repayments when the fixed rate expires”.
Mr Zeller’s tips for curbing the interest rate grenade:
Talk to your lender
Negotiating a lower rate with your lender should be at the top of your checklist of if your fixed rate is due to expire this year. Lock in a time with your lender and discuss if this is an option for you or make them aware of better offers which are available right now. At the end of the day, the bank is making money from your loan, so if you tell them you’re considering refinancing with another lender (even if this is a bluff), they might be more inclined to negotiate with you to avoid losing your business.
Ignorance is not bliss – If your locked-in rate is due to expire this year, it’s crucial you book a time with your lender. Keep in mind your lender is probably very busy right now, so you should be contacting them at least a month or more before your fixed rate expires.
Ask your lender how much you’re going to be repaying when the fixed rate comes off, so you don’t get blindsided. For example, Australians with a $600,000 mortgage are already paying more than $1000 each month than they were at the start of May last year. Better to ask in advance and be prepared versus unexpectedly getting hit by the interest rate grenade.
Enquire about an offset account
An “offset” account is a really useful transaction account that is worth looking into if you don’t have one already.
It’s linked to your standard variable rate home loan or investment home loan and money you put into your offset account reduces the balance on which the bank charges interest. This means you’ll only be paying interest on the difference.
For example, if you have $50,000 in your offset and your loan balance is $300,000, you’ll only pay interest on $250,000 of your loan balance.
Some key questions to ask your lender:
- Is your loan eligible for an offset account?
- Is it 100% of the balance of the account that will be offset?
- Are there any account fees that come with an offset account?
- Are there any limits to the amount or types of transactions to the offset account?
- How easy is it to access the money in an offset account compared to a redraw facility?
- Will the reduced interest on your home loan be greater than the interest you would make if the savings in the offset account were in a savings account?
Change your repayments or access redraw
If you’ve made additional payments into your home loan and are worried about coming off your locked-in rate, talk to your bank about the option of redrawing those additional payments or reducing your repayments.
You can choose the repayment amount that is deducted from your account each time. However, the total deducted each month must be at least equal to your monthly instalment amount.
You can choose a payment frequency that will make it easier for you to manage your bills and make your repayments on time and it may impact the lifetime interest payable on the loan.
Refinance your loan
Refinancing can potentially save you a lot of money over the life of your loan. There is an unprecedented number of cash-back offers on the market right now too with great rates attached so it really does pay to shop around when it comes to home loans.
If you find a home loan that you think could offer better value than your current one, whether due to a lower interest rate, lower fees, or access to more loan features – definitely consider it.
But look out for:
- Fees – Ask the new lender to waive upfront fees
- Break costs – If you refinance from a fixed-rate loan before the fixed term is up, you could incur significant break costs
- Cashback deals – The allure of cold hard cash can be tempting but its only worth taking it if it comes with a good rate
- Avoiding an ugly revert rate – Fixed rate loans usually revert to a standard variable interest rate after a pre-determined amount of time, which is often much higher than the market average rate
Refinancing isn’t as hard as it seems but make sure you do your research and compare before making the switch. It always helps to speak with an expert first or try negotiating a better rate with your existing lender.
With another rate rise on the horizon, it’s extremely important to reassess your financial situation and or budget if you have one.
If you don’t currently have a budget and your rate is due to expire, it’s time to make one. Look at where your money is going and see where you can cut back. There are plenty of budget planners available online to take the work out of manual labour. Once you’ve taken a look at your spending, it can be useful to group your regular income in accounts.
Renovating your property can improve its value, but it’s important to consult a real estate agent or design specialist first. It doesn’t matter how capable you are in terms of design or trades skills if you are going to renovate your property you need to make sure it will increase the property’s value.
If you have savings, you could look at renovating the kitchen or bathroom as an investment to modernise the property and increase its equity. It’s important to consider your financial circumstances before making any decisions, so you don’t increase your debt.
Sell your property
If you’re already struggling to meet your repayments whilst juggling the cost of living pressures, and your fixed rate has yet to expire – you might want to consider selling your property or subletting a room that you’re not using.
If you’re in financial stress, it’s crucial to think about whether selling is the right option for you to prevent further debt. A good real estate agent could have the marketing power to find the right buyers and the right price for your property. Remember, if there’s an offer on the table that you don’t like, you can decide against selling.
Mortgage Relief Loan
Depending on which state you live in, mortgage relief is available. For example, the Mortgage Relief Loan in Queensland is available to help people who are having difficulties with their home loan repayments due to unemployment, accident, illness, or some other unexpected or unforeseen crisis.
The loan is interest-free with no application fees or ongoing charges. You can borrow a maximum of $20K, repayable over 10 years in addition to your home loan repayments.” The repayments start 12 months after you get the loan, so you would ideally want the short-term issue to be resolved by then.
To be eligible for the Mortgage Relief Loan you must be a Queensland resident, but there are similar options available in the ACT, New South Wales, and Victoria.”
For more information, please contact:
Natasha Innes | 0416 705 514 | [email protected]
Compare the Market is a comparison service that takes the hard work out of shopping around. We make it Simples for Australians to quickly and easily compare and buy insurance, energy, travel and personal finance products from a range of providers. Our easy-to-use comparison tool helps you look for a range of products that may suit your needs and benefit your back pocket.