Mortgage furnace can feel too hot to handle, but there are options

From cliffs to prisons, it’s been a hellish 15 months for mortgages but there are ways to ease the pressure caused by higher interest rates.

Mortgage prison. The mortgage cliff. Mortgage hell. It hasn’t been a good year for Australians with home loans, and for some people the pain is just beginning.

The lucky ones who locked in fixed-rate mortgages a couple of years ago at around 2 per cent are suddenly finding their repayments jumping more than 50 per cent in one hit as they revert to variable rates above 6 per cent.

That’s the mortgage cliff, and it’s not a comfortable place.

Other borrowers are trapped in a mortgage prison, where their repayments have surged but their home value and wage has not, locking them out of refinancing opportunities.

However, there are strategies to help you cope with the pain, mortgage specialists say.

On Tuesday the Reserve Bank of Australia kept its official interest rate on hold at 4.1 per cent but warned that more rises may still occur.

The founder of mortgage broker Two Red Shoes, Rebecca Jarrett-Dalton, says the past 15 months have been “difficult in a word – and increasingly so”.

“Many borrowers have been very surprised at the reduction in their borrowing power as each interest rate rise hits – and the double whammy of the increased cost of living is biting heavily too,” she says.

“Borrowers are disappointed and disheartened. Those who are looking to refinance and find they can no longer qualify even for the loans they have are shaking their heads.”

THE PRISON

People with big debts and little equity in their homes have found themselves locked out of alternative mortgage options because they no longer satisfy repayment requirements needed to switch.

Rebecca Jarrett-Dalton says mortgage borrowers are disheartened. Picture: Kirsten Flavell

A 3 per cent safety buffer that banks have used to stress test mortgages – that sits on top of variable rates already near 6 per cent – has recently been reduced to 1 per cent by several lenders, and Jarrett-Dalton says these changes are positive for refinancing existing loans.

“If at all possible, pay as much extra as you can into the loan – interest rates don’t matter on the money you no longer owe,” she says.

Oracle Lending Solutions managing director Angelo Benedetti says borrowers have experienced a rollercoaster amid mixed messages and economists getting their forecasts wrong.

“However many rate rises we get, it’s quite exorbitant and has an impact – especially when the Reserve Bank said there would be nothing until 2024,” he says.

Benedetti says the impact on people’s borrowing capacities has made it impossible for some to get out of an expensive mortgage, but he notes the banks’ recent changes in safety buffers create more chances to do something.

“Try and get the best possible discount,” he says.

Some clients are temporarily switching to interest-only loans to lower their repayments, others are shaving other expenses to afford the extra costs, and some are extending their loan life – perhaps from 28 to 30 years – to reduce the impact, Benedetti says.

“There’s a lot of things you can do by picking up the phone and asking,” he says.

Consolidating other debts – such as credit cards – into a mortgage can lower overall repayments and “that helps people take a breather for the next 12 months”.

THE CLIFF

Benedetti says there is a lot of nervousness among people who have a fixed-rate mortgage costing 1.9 per cent that will soon balloon to more than 6 per cent as the fixed term expires.

“In some cases it’s $40,000 a year extra, and that’s after tax money,” he says of the cost spike.

Benedetti says talking to your bank ahead of the rate change is vital.

“Banks do not want to put you in a worse position, and they want to keep you as a customer,” he says.

Jarrett-Dalton also recommends calling your bank and negotiating what you pay when the fixed term expires, and says there is merit in engaging a broker to help you with comparisons.

“And if they don’t meet the market or come close enough, then look at refinancing – hopefully the positive changes will work in your favour,” she says.

People who refinance should be aware of the costs involved such as government charges, exit fees and application fees, and understand loan terms, Jarrett Dalton says.

Homeowner Vanessa Fabris has watched rate rises with trepidation. Picture: Jake Nowakowsk

THE EXPERIENCE

Vanessa Fabris bought a home in late 2022 – right in the middle of the Reserve Bank’s rate-rise barrage – and says what should have been an exciting experience has been “a whirlwind of mixed emotions, mostly trepidation”.

“Our household has two full-time salary earners and we find ourselves often questioning whether our position is sustainable,” says Fabris, an associate director at KPMG.

Switching loan repayment frequencies, paying off a HELP study debt and budgeting wisely have helped ease the pressure, she says.

“It sounds very simple, but we find ourselves cooking at home a lot more rather than eating out.

“The cost of a casual weeknight dinner with my husband has markedly increased and we can stretch our money a lot further by preparing food at home. I also bring my lunch to work which saves around $50 a week.”