Interest rate rises hurt repayment plans, but loans can be shortened

Painful Reserve Bank interest rate rises have made quick home loan repayment seem impossible, but some strategies still work.

A couple of years ago a story that I wrote about how to pay off your home loan within a decade attracted huge interest.

Fast forward to today, and the focus for many borrowers is simply on survival rather than quick repayments.

Two years ago the Reserve Bank’s official cash rate was 0.1 per cent and now it’s 4.1 per cent.

Meanwhile mortgage rates that were below 2 per cent in mid-2022 are now near 6 per cent.

That has meant monthly repayments on every half a million bucks borrowed has surged by more than $1130 since the RBA started raising rates in May 2022. For a $750,000 mortgage the monthly increase has been $1701.

What is also worrying is that fixed-rate mortgages were at a record high in early 2022, comprising more than 40 per cent of all mortgages, thanks to the record-low interest at the time.

The Reserve Bank says most fixed-rate mortgages are for less than three years, and more than half of the fixed-rate loans that were outstanding in 2022 will expire this year.

Borrowers must balance their mortgage with other surging household costs. Picture: iStock

That delivers an instant interest rate rise of more than $1100 a month for many borrowers – it’s no wonder experts fear a mortgage cliff and economic data is showing some serious weakness.

However, the strategies that can help you repay a mortgage in a decade are similar to those that help you stay on top of rapidly-rising interest rates.

PAY MORE THAN THE MINIMUM

Back in 2022, a 30-year mortgage could have been reduced to 10 years by paying an extra $2200 a month – possible for many people in a pandemic where travel and other lifestyle expenses were not available.

Rate rises and other cost-of-living increases dramatically reduce households’ ability to do this, but anyone who can afford to pay extra should still try, as it builds a buffer against future rate rises.

SEEK SAVINGS

Speak with your existing lender to ask for a better deal. You may be surprised at what they offer to a good customer.

Other savings can be spotted by going through your online credit card and cash account transaction history.

Digital money makes it easy to miss unnecessary spending, and any cash saved can be diverted to the mortgage.

MAKE MONEY WORK FOR YOU

Using offset accounts and redraw facilities means every spare dollar you have can help reducing your interest bill. Money sitting in these accounts lowers the outstanding loan balance, so more repayments go to paying off the principal rather than interest.

SHOP AROUND

Use comparison websites such as RateCity, Canstar, Finder and Compare the Market to search for a better interest rate. Alternatively, a mortgage broker could also help you find a cheaper lender.

While the big four banks are offering ongoing variable interest rates around 6 to 6.25 per cent, some smaller lenders still have rates below 5 per cent, according to RateCity.

Refinancing to a new lender has become tougher in recent times because rate rises have made mortgage servicing difficult, but borrowers with plenty of equity and a decent income should still be able to pursue a better deal.