What if the interest rate on your home loan increased by 2% overnight? Would you be able to handle your repayments? To put it in dollar terms, if you owed $500,000 over 25 years at, say, 4%, your monthly repayments would be $2639. A 2% hike would mean an extra $583 a month. If this sounds painful to you, you’re not alone. As many as one in five households struggle to pay their mortgages and Grattan Institute research reveals more households could face financial stress if rates were to rise by just 2%.
Brendan Coates, a Grattan Institute fellow, says: “Our research suggests that if interest rates rose by just 2%, the mortgage burden on the average house would be higher than it has been in the last two decades.”
If you’re stressing over your mortgage, which technically means you’re spending more than 30% of your household income on repayments, here are five things you could do to ease the pain.
Don’t pay more interest than you have to. Right now you can pick up a variable rate home loan for as little as 3.49% but before you jump lenders it pays to do a breakeven analysis. Add up all the costs of moving (your new lender may request a valuation fee and may also charge an establishment fee) and divide this by your monthly savings. If, for example, it costs $1000 to move but you’d save $50 a month in repayments, your break cost is 20 months, meaning it will take you just under two years to recoup the cost of moving. Can you be certain that your new lender will be just as competitive in two years? It’s best to always negotiate with your existing lender first. The loans in the table all have a redraw and offset facility but don’t come at a premium. More than likely you’d probably have a packaged loan if you’re with a major bank, which means a discount of around 0.8%. Even so, the difference in repayments on a $500,000 loan when comparing the average discounted standard rate from the big four with the cheapest in the market is $259 a month.
Make the most of your income. Put your pay directly into your offset account. This way you’re reducing the interest on your home loan from the moment you get paid. If you live off your credit card during the interest-free period then you maximise your interest savings.
The idea is that on payday your entire salary goes into your offset or redraw facility. You use your interest-free credit card for your living expenses. During this time and when your credit card bill comes, the salary in your offset or redraw account is cutting your home loan interest bill. This strategy only works if you don’t spend more than your budget allows and you repay your card before the interest-free days end.
Rent out your home. Sometimes all you need to get back on your feet is six months or so with no mortgage repayments. If you can move back home or rent a much cheaper place then this strategy can work a treat. You may also be able to take advantage of the six-year rule, which allows you to rent out your main residence for up to six years without incurring capital gains tax. Best to talk to an accountant first.
Claim financial hardship. If you entered into a credit contract on or after March 1, 2013 you can apply for a hardship variation whatever the value of your loan. The first thing is to tell your bank you can’t afford your repayments. This is known as providing a “hardship notice”. Your bank then has responsibilities to act within certain time frames. Your bank will either postpone or defer payments, capitalise your interest, restructure your loans, freeze your loan or offer a temporary overdraft. See doingittough.info for more details on what your bank can do.
Prepare for any rate rises. You can protect your payments by locking in. Most fixed-rate loans allow extra repayments of up to $30,000 over the fixedrate period. If you really want to maximise the amount of extra repayments you can make without being hit by a penalty, then split your fixed loan into two fixed accounts. This doubles your extra penalty-free repayments. Be sure to also focus on paying off any high-interest-rate personal debts.