Rate rise tips to help borrowers get through the current squeeze
Seven straight interest rate rises means many households face their worst cost pressures in decades. Here’s what you can do.
Despair is an increasingly common feeling in Aussie households as interest rate rise number seven hits home hard.
The Reserve Bank’s Melbourne Cup Day cash rate increase of 0.25 percentage points means repayments on variable-rate mortgages have risen 40 per cent since the RBA’s consecutive monthly rises began in May.
This is unaffordable for many households, and rates are expected to go higher still, but there are several strategies available to borrowers to ease, delay or avoid the worst of the financial pain.
Here are 10 tips that can be considered right now.
1. Chase a lower rate: Check several online comparison websites to see how your current mortgage stacks up, ask your lender if they can match or beat their competitors, and be prepared to switch lenders if possible and necessary.
2. Refinance: This can be done with your existing lender or a new one, and may involve changing rates and loan terms to lower your current costs.
3. Speak up: Now is not the time to suffer in silence, so talk to your lender ASAP if you have repayment worries, rather than sink deeper into a debt spiral.
4. Seek hardship help: The pandemic prompted lenders to become much better at dealing with customers who are struggling financially, and all have hardship teams that may offer you relief such as a short-term repayment holiday.
5. Switch to interest only: By temporarily changing your repayments from principal and interest to interest-only, you could save almost $850 a month on a typical $500,000, 25-year mortgage. Lenders’ hardship teams may offer this, or you could request it yourself, but understand that during an interest-only period your debt will not drop.
6. Consolidate debts: Do not see your mortgage in isolation from other loans and consumer debts. You can potentially consolidate those higher-interest borrowings – such as personal loans and credit cards – into the lower-interest mortgage to reduce your overall repayments.
7. Trim your spending: Nobody likes to make cuts to their spending budget, but for many households this is the worst financial emergency in decades. Go through recent bank statements line by line and question every spending choice. Small regular expenses and habits add up significantly over a year.
8. Dip into savings: Covid-19 produced a huge surge in household savings, and if you have some or a mortgage redraw facility buffer, now may be the time to use it. A no-interest or low-interest loan from a family member with extra savings may also help you through the current strain without losing your home in a forced sale.
9. Get help: Households everywhere are struggling – that’s what happens when their largest expense jumps by 40 per cent in just seven months. Don’t be too proud to seek advice, with free financial counselling available by calling the National Debt Helpline on 1800 007 007.
10. Remember it’s not forever: Several economists expect rates to begin dropping again from 2023 as the Reserve Bank’s rate-rise cycle weakens the economy and lowers inflation. Getting through the next six-to-12 months may be all that’s required for your long-term finances to survive.
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