How to reduce the pain of interest rate rises on mortgage repayments

Mortgage repayments are set to increase dramatically in the next year but this is how you can reduce the financial pain.

With interest rates now on the rise, many Australians may be worried about the cost of their mortgage repayments but there are some options to keep them as low as possible.

The Reserve Bank of Australia announced a 0.25 percentage point increase to its cash rate on Tuesday with the big four banks moving soon after to announce this would be passed on to their customers.

It would see mortgage repayments on a $500,000 loan increase by around $68 a month

and with more rate rises expected, this could jump to $567 a month if there is a 2.0 percentage point increase – something that many experts believe could happen by mid-next year.

This would put a significant dint in people’s household finances, but there are ways to minimise this.

Extend the length of your loan

The most obvious option would be to extend the length of your loan, although this is not ideal as while this would reduce your repayments, it will mean you pay a lot more in interest over time.

“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 noted.

If the cash rate rises to 2.5 per cent (from 0.1 per cent prior to the recent rate rise), this would add around $200,000 in extra interest charges.

Ask for a better deal

For those who have had a mortgage for a long time, Choice chief executive officer Alan Kirkland believes you 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,” he 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,” Mr Kirkland said.

“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.”

The Australian Competition and Consumer Commission (ACCC) found 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.

Someone with a home loan of $250,000 could save $1400 in interest in the first year by switching to a loan with the lower rate. This could total $17,000 in savings by the end of their loan term.

Find other ways to save money

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

“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,” she 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.”

Ms Morgan also recommended people look at their service providers, including electricity, gas and various insurance.

“See if there are any savings to be made in changing policies or providers,” she said.

Mortgage pain can also be eased by finding savings in other areas or by consolidating debt. Picture: iStock

Pause your repayments

If you are under genuine financial hardship you can ask your bank for a temporary moratorium on your repayments to give you some breathing room.

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

On some occasions the banks will add the arrears to the mortgage.

Lock in a fixed loan

For people who are extremely risk-adverse, they may prefer to go on a fixed-rate loan, instead of a variable, which means their repayments will remain the same.

However, fixed rates are substantially higher (up to 4.99 per cent) than variable rates at the moment, which were still as low as 2.19 per cent as of Tuesday morning.

While most experts expect the RBA to raise the cash rate by 2 percentage points over the next two years, if you lock in a three-year fixed rate of around 5 per cent, you would be paying higher interest for at least some portion of the life of your loan.

However, if interest rates go up faster and higher than expected, you could be better off in the long term.

Another option is to fix a portion of your loan, and leave the rest as a variable loan with an offset facility so that you can put extra money in and reduce your repayments.

Get on top of further rate rises

There are sure to be further rate rises and this will be felt even more once the cash rate is up around 2.5 per cent.

It’s important for people who are lucky enough to have already locked in low fixed loans, to understand they will likely be paying much more once these end, and to think about their future household budget, even putting money aside to ensure the increased payments are not too much of a shock.