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The more than three million Australian mortgage owners feeling the impact of rising interest rates will no doubt be wondering when this nightmare will end.
Last year, the Reserve Bank Governor, Philip Low, said it was “still plausible” official interest rates would not rise before 2024, but, numerous rate rises later, Australia still has some way to go until inflation is back in the desired 2 to 3% zone.
So where does that leave those with mortgages? According to the 2021 census, the number of home owners in Australia stands at 6.2 million.
Household figures without a mortgage stands at 32% (2.9 million households); those with a mortgage is 3.3 million households or 35%.
With each hike, home owners can expect to add hundreds of dollars to their monthly loan repayments.
In September 2022, the Reserve Bank of Australia raised the cash rate by 50 basis points to 2.35%. The move followed a 50-bps hike three months prior and a 25-bps rise in May, bringing the cash rate to a level not seen since January 2015.
Fears that the average variable rate mortgage will become even more expensive in months to come will have customers looking for better deals.
Re-financing Figures Hit a High
Recent figures from ABS found borrower’s refinancing had reached an all-time high value of $18.1 billion in June 2022.
All too aware customers are looking to switch, banks have aggressively started to contact customers to stop them from moving to another lender.
Don’t be surprised if you get a call from your bank offering cashbacks and competitive rates.
For anyone looking for better rate, the potential for big discounts has never been better as competition between lenders for borrowers is intense, particularly for those looking to refinance.
You may be tempted to stick to one of the big four, but if you have a healthy deposit of equity in the home, it could be worth looking at a credit union or digital lender, such as UNLOAN or loans.com.au. For those who are on a fixed rate, you will only need to compare rates or negotiate better deals when their loan terms expires.
Importantly, low interest rates may not be offered to all. This will depend largely on the loan amount, for example an amount in excess of $800,000. The other criteria is your loan-to-value-rate or LVR.
Check also if there are any hidden fees that come with any low interest rate.
How Much Can I Borrow?
The amount you will be able to borrow differs widely from person to person. This is why it is important to shop around for the best loan for your situation.
Borrowing power is determined largely on your deposit amount, your earnings and ability to pay back your loan and to keep up with your on-going loan repayment commitment.
Also bear in mind that the borrowing power of the average person has decreased in the last few months as interest rates have hiked.
If you’re concerned about future rate hikes and what you can expect to pay, the use of a mortgage calculator can help you determine what your payments could look like in the event of another rate hike.
Mortgage repayment calculators show how much extra you may have to pay each month following a rate rise.
What are the Banks Looking For?
The banks will be looking at acceptable debt-to-income ratios for any loan recipient. The amount of deposit will impact your lending power too.
Bear in mind, the higher the loan-to-value-ratio LVR or the lower your deposit to equity in your home, the higher your interest rate.
The bank will also go through your bills, debts and income with a fine tooth comb. The loan process will require you to provide a number of key documents to verify your identity and assess your financial situation. These include:
- 100 points of identification, typically in the form of a driver license, Medicare card and/or passport.
- proof of income, which will typically include two to three months’ worth of payslips.
- proof of savings, typically in the form of two to three months’ worth of bank statements.
- Assets you own, such as a car.
- Liabilities, credit card debts, other loans.
- Some may request a list of your regular monthly bills, such as groceries, utility bills, school fees.
What is the Loyalty Tax?
It seems crazy, but a loyalty tax is the premium you pay for sticking with one lender when that same lender is offering a lower interest rate to its newest customers.
If you plan on sticking with the same lender, then It is well advised to get on the phone and refinance your loan.
Before you Refinance Your Loan...
If you’re about to refinance your loan, then get on the phone to your lender – ideally, start the conversation a couple of weeks before your loan is due to expire.
An hour or two on the phone is worth the effort to talk to them and ask them for a better deal. If you can negotiate a better rate, then you will not have to go through all the document checking and point checks listed above. If your bank doesn’t give you a better deal, and you can find one elsewhere, then the savings are worth switching over.
It is in the interest of your lender to keep its customers than have you going to another lender.
Frequently Asked Questions (FAQs)
What does the comparison rate mean?
A comparison rate is the total cost of your loan payment, not just the interest rate. A comparison rate includes the interest rate as well as certain fees and charges relating to a loan. The aim of the comparison rate is to help you identify the true cost of a loan and compare loans.
Are home loan rates going up?
The simple answer is yes, the Reserve Bank of Australia (RBA) is forecast to hike the cash rate periodically over the next two years.
How high will home loan interest rates go?
A few bank economists have put forward their predictions of how high the cash rate will rise, of course these are only predictions and no one is 100% certain.
Forbes Advisor contributor Jason Murphy offers his thoughts on how high they will go, and notes that the “narrow path” the RBA is on might actually be more of a tightrope walk.
What are the home loan rates on offer today?
Variable home loan rates vary significantly. There are still some on offer in around the 3%-plus range. What may appear to be a low rate, could have extra charges or fees that some other lender does not have. Again it pays to shop around.
What does the LVR mean?
LVR is the amount you are borrowing, represented as a percentage of the value of the property you’re buying. The bigger your deposit, the lower the LVR will be.
