Financial expert reveals best way Aussies can get their home loan right

With the Reserve Bank predicting thousands will soon be shifting to variable rates on their home loans, one expert has revealed how to avoid further financial strain.

As hundreds of thousands of Aussies brace for more mortgage repayment pain amid the Reserve Bank’s latest forecast, a financial expert has revealed the best way people can get their home loan right and avoid financial headaches.

Marion Kohler, head of the RBA’s economic analysis department, delivered the grim news on Wednesday that more than 800,000 households were forecast to shift from fixed rates to the more expensive variable rates this year.

The move could deliver a major interest rate shock to some Aussies, who could face up to $1000 in extra repayments on their mortgages – this is after rates spiked from 0.1 per cent in April last year to 3.1 per cent by the end of the year.

Marion Kohler, RBA head of economic analysis, told a Senate committee on Wednesday more than 800,000 households across Australia would move from fixed rates to more expensive variable rates this year alone. Picture: Supplied

Financial expert Richard Whitten said some people could be facing a “huge burden” moving onto variable rates in an economy already strained by inflation and rising cost of living.

Speaking to NCA NewsWire, the money editor of financial comparison website Finder said there was one key thing people could do to combat interest rate pain: get advice and shop around for lower rates.

“Usually that means refinancing: so looking elsewhere, comparing, finding a lower rate loan for a similar kind of product,” Mr Whitten said.

“That’s usually the best way to shave off a little bit of that interest rate cost.”

Mr Whitten said a lot of lenders were increasing their rates, but also lowering rates for new borrowers in order to try to entice new business.

“Let’s say your rate is stuck at 5 per cent now – you might find other lenders are doing 4.8 per cent or 4.7 per cent or something, and that’s 30 basis points lower,” he said.

“It still translates to $100 a month – so it’s some kind of saving you can get.”

Shopping around for lower rates in the face of increased variable rates is the best way to avoid any potential financial burden and make it easier on yourself to meet repayments, according to Finder money editor Richard Whitten. Picture: NCA NewsWire / David Swift

Refinancing to a new 30-year loan is also an option in order to give borrowers more breathing space in monthly repayments, but Mr Whitten said the caveat of this was people would end up paying more over the long run.

“It increases the interest, but you can make that work for you,” he said.

“It drops your repayments a bit month-to-month and you can make up that time if you have an offset account or extra repayments on the loan, you can still sort of stay ahead.

“Extending the loan can increase your interest over time, but you can manage that in a way where it doesn’t actually impact you as much.”

Looking to buy outside of capital cities – something Mr Whitten said was a “tough” move – is another option which could change what people could afford and deliver a better long-term saving to the hip pocket.

In giving advice to people moving onto a variable rate, he said the first thing to do was to check what the new rate was going to be.

Then, a question must be asked – “Is my lender giving me the best deal for my current loan?”

“You would hope that a lender wouldn’t put someone on a 2 per cent to a 6 per cent … you hope they would give their best available variable rate offer,” Mr Whitten said.

Inflation is expected to ease this year according to the RBA, but Richard Whitten says borrowers still need to look at their repayments in the context of interest rate hikes and how they would factor into their budgets. Picture: NCA NewsWire / David Swift

“Beyond that, get a loan repayment calculator now, factor in your rates and ask ‘What do my repayments look like at 5 per cent? At 6 per cent?’

Mr Whitten urged borrowers to look at the potential repayments and ask how they would fit into their budget, including how they would manage different expenses.

The RBA estimates about $350b worth of loans would shift to variable rates but even the estimation of 800,000 households was a “rough” estimate.

Ms Kohler made her comments during the Senate cost of living committee on Wednesday, but clarified the RBA had determined the peak of inflation was at the end of 2022.

“We think … (it) will begin to ease over the course of this year,” she said.

“We understand that some people are finding the rise in interest rates difficult to manage and others will have to cut back on discretionary spending.

“However, higher interest rates are necessary to ensure that the current period of higher inflation and cost of living pressures does not persist too long.”

Despite the green shoots, Mr Whitten said it was still not a great time for people to get into the housing market.

Examining factors like the massive jump in rates, low wage growth, the ongoing recovery from Covid-19 and house prices rising and falling, he said it was tough to try and break into capital city markets.

“Lenders are very much aware of their responsibilities and their obligations under the National Consumer Credit Protection Act,” Mr Whitten said.

“They really do want to see you’re borrowing a sensible amount of money that you can afford to repay, that your income is stable, that your expenses and spending are within reason – they’re looking at all that very closely.”