Three out of the four major banks have increased their interest rates in the last few weeks, forcing mortgage holders to find a few hundred extra dollars every year.
While the increases aren’t massive, Westpac will raise rates by 14 basis points, CommBank by 15 basis points and ANZ by 16 basis points. With all increases coming into effect over the next month, it is enough to cause borrowers a moment of concern.
The most worrying part of the rate hikes is they were not linked to any action by the Reserve Bank of Australia, which has kept rates on hold for several years. That doesn’t seem to be getting in the way of lenders lifting their loan rates, however.
Following this interest rate spike, many homeowners and investors are taking a much-needed look at their finances and their mortgage to check in with the current state of play.
If you have a home loan, what are some of your options to combat rising interest rates?
1. Call your lender
A simple phone call can save you hundreds, sometimes even thousands of dollars over the life of your loan. Just ask to speak to someone about your loan, and when you’re connected to the right person tell them you’re thinking of refinancing unless they can offer you a better deal.
Mortgage holder Sam, 37, called his bank when he saw their online advertisement offering ‘new borrowers’ an interest rate 0.3% lower than he was paying. While the bank couldn’t quite match the full discount, they did offer a reduction of 22 basis points.
On his loan of $620,000, he instantly saved over $1300 per year, or more than $100 per month.
It’s true that banks have ramped up their loan criteria in recent times in response to APRA guidelines and the Royal Commission, which make it harder to get loan approval.
However, keep in mind that this means their bottom lines are taking a hit, too. Banks are in the business of lending money. They actively want to lend you money because it’s how they make a profit.
So, if your current lender isn’t willing to come to the party, shop around for a better deal with another bank. Kasey, a homeowner just outside of Brisbane with a $410,000 mortgage, recently refinanced and is now saving $450 per month.
When refinancing, consider working with a mortgage broker who can review a number of different loan products and best match you with a lender who suits your situation, whether you’re self-employed, on maternity leave, have expanded your family or have recently changed jobs.
3. Make extra payments
Most borrowers don’t fully appreciate how much money they can save by paying even a very small additional amount, we’re talking the equivalent of one coffee per day, into their home loan.
Let’s start small. Say you are able to pay an extra $10 per week into your home loan. Based on a $500,000, 30-year loan at an interest rate of 4% and assuming you started making these $10-per-week payments 2 years into your loan term, you would save almost $12,000 in interest over the life of your loan.
You’ll also pay the loan off 10 months sooner.
Here are a few other scenarios, to show you just how much of an impact extra payments can have on your overall wealth and financial position.
These are all based on 30-year loans at an interest rate of 4%, and assume you start making extra repayments 2 years into your loan term:
|Loan amount||Extra repayment amount/week||Total interest savings $||Time shaved off loan term|
|$400,000||$20||$22,280||2 years 1 month|
|$400,000||$50||$49,000||4 years 9 months|
|$500,000||$20||$22,700||1 year 8 months|
|$500,000||$50||$51,000||3 years 11 months|
|$500,000||$100||$87,490||6 years 10 months|
|$600,000||$20||$23,000||1 year 5 months|
|$600,000||$50||$52,500||3 years 4 months|
|$750,000||$20||$23,280||1 year 2 months|
|$750,000||$50||$54,000||2 years 9 months|
|$1,000,000||$50||$55,700||2 years 1 month|
|$1,000,000||$100||$102,000||3 years 11 months|