Home loan pain: how to prepare for more interest rate rises

No matter how you rate your mortgage, now is the time to make some moves before rates rise quickly.

Just one interest rate rise this month by the Reserve Bank of Australia has been enough to freak out many people paying off big mortgages.

It’s not only the financial pain of that one increase, the RBA’s first since 2010, but the threat of more rate rises to come (potentially many more) that is seriously stressing borrowers.

However, there are ways to future-proof your mortgage against a barrage of upcoming rate rises.

Step one is knowing the rate and dollar amount you currently pay on your home loan. Call your lender, check bank accounts online or read your latest statement.

If you’re on a fixed-rate mortgage like many recent borrowers and refinancers, you don’t have to worry too much about the May move – unless your fixed-rate term is ending soon - but should monitor changes.

RateCity research director Sally Tindall said it’s important to check your mortgage rate against what other lenders are offering.

“Right now, there’s a 1.13 percentage point gap between the average existing variable rate and the lowest rate,” Ms Tindall said.

“If you can get a full percentage point off your rate now, you could protect yourself against the next four cash rate hikes.”

AJ Financial Planning founder Alex Jamieson says financial markets are pricing in more than 2.5 per cent of rate rises over the next 18 months.

Variable home loan interest rates are expected to rise many more times this year and next.

Personally, I don’t believe those financial markets. Yes, they got it right by predicting rate rises this year rather than the RBA’s earlier forecasts of 2024, but 2.5 per cent more will crush some households.

If people are paying hundreds of dollars a month more on home loans, they will get scared and stop spending, which will rein in inflation and remove the RBA’s reason to raise rates further.

We can certainly expect more increases, probably as soon as June, so understanding your current financial situation is crucial.

Budgeting is boring at the best of times, but it’s really just a map showing where your money comes from and where it goes. And if yours is showing more going out than comes in, you’re in trouble.

“It is important that if you don’t have a budget you get one in place now, before these rates really start to move, so you have some understanding of your ability to handle these changes,” Jamieson says.

People can use online calculators to plug in how much future rate rises will cost them personally and, if it’s looking bleak, prepare an action plan.

“Reduce your living expenses,” he suggests.

“It sounds straightforward, but work through all your expenses and remove things you can live without.”

Jamieson says options to save include:

• Asking your bank for a rate discount or refinancing your mortgage to lender who will give you one;

• Considering an interest-only loan for a short period until you can reorganise;

• Contacting other bill providers, such as your insurance, energy, phone and internet, to negotiate.

Many of us, myself included, waste a pile money by failing to get the best deals. Now is the time to change that.

Originally published as Home loan pain: how to prepare for more interest rate rises