Mortgage rates: 10 ways to combat rising costs
Asking how to keep your home while Interest rates are rocking the housing market? It’s a question for many Australians as mortgage stress bites
Interest rates keeping heading north and that means homeowners are dealing with a surge in their mortgage repayments. Rising inflation on basic cost-of-living necessities, fuel prices and sky-rocketing energy costs are adding to the pressure on homeowners.
For example, today a homeowner with a $500,000 home loan who is paying the RBA’s owner-occupier variable rate of 2.19% in April and has 25 years left on their loan has seen it increase to 5.19% in just 8 months!
With another rate hike by the RBA in February 2023, this means that homeowner is now paying $876 more per month for their mortgage.
Many new and existing homeowners may now be experiencing ‘mortgage stress’ as these unexpected economic factors combine.
Buying and owning a home in Australia is increasingly difficult and many people work incredibly hard to reach that achievement. The prospect of having to sell their homes and re-enter a fiercely competitive rental market is a nightmare for many, but with a little forward thinking it can be avoided in most cases.
So what is mortgage stress, and what can you do about it? Newy Finance breaks down some of the options, from the straightforward to the creative.
The Mortgage Stress Test
Mortgage stress typically refers to a situation where households begin struggling or are unable to meet their mortgage repayment obligations. This usually begins when a household spends more than 30% of their pre-tax income on housing costs.
Though there is no official definition of mortgage stress, Property Economist Mark Wist explains it succinctly to Forbes readers:
“Conventionally, mortgage stress happens when interest repayment obligations consume a more than comfortable portion of a household budget,” Wist says.
“The threshold is often considered to be around 30%-35% of gross income, above which concern builds as other household financial obligations and hard costs begin to be affected.”
Though some households may be unable to change their circumstances, Wist says others have more contributing factors that could help relieve some of the burden.
“For example, if the mortgagor had the capacity to increase income at will, that stress could be alleviated. Similarly, if the mortgagor is ahead on payments, there may be a buffer which can be drawn down for a period of time to offset increased interest obligations.”
According to Roy Morgan, there are 19.4% of mortgage holders experiencing mortgage stress according to Roy Morgan and that figure is predicted to increase to 24.3% in 2023 if the RBA raises the cash rate in line with predictions. For perspective, this figure was 35.6% during the Global Financial Crisis.
The bad news is this shows a much higher percentage of people ‘at risk’ of struggling of defaulting on their mortgages than the average 12.7%. The good news is that there something homeowners can do to weather the storm and hang onto their homes.
How to afford repayments with a higher mortgage rate
Every household will have varying degrees of flexibility when it comes to reducing the impact of fast interest rate rises on their finances and mortgage repayments. Some of these include:
- Evaluate your budget – When it comes to finding extra money for higher bills and repayments, the best place to start is by looking at your existing cash flow and budget position to find savings. Using a mortgage calculator can help you assess whether your current repayments are ideal at a higher interest rate, and what any shortfall might be.
- Cut discretionary spending – The first things to reduce in a budget to find savings are always things we don’t class as ‘necessary’. This might be going out to eat, taking weekends away or spending less money on clothes and luxury goods.
- Optimise necessary spending – While food, fuel and utility costs are rising, it’s important to keep an eye on whether you’re getting the best deal and look for ways to cut down. This could be as simple as switching energy plans, carpooling to work and getting savvier in the kitchen to bring food costs down.
- Use your mortgage offset account – If your home loan comes with an offset account, you can put extra money into this to reduce your future interest payable. You are able to withdraw funds like a normal transaction account if needed, making it a great saving tool with a bonus function.
- Make extra mortgage repayments – If you’re able to make extra payments on your mortgage without a penalty, throwing extra cash into your mortgage will drive it down faster right alongside your interest amounts. If you got a great tax return, sold an extra car or came into some extra money, consider putting it towards reducing your mortgage as soon as possible.
- Get a mortgage refinance – Have a discussion with your mortgage broker about refinancing options that may get you a mortgage with a better interest rate, loan term or conditions. Just like utility plans and insurance, it’s always worth checking to see if you have the most competitive arrangement. While having good credit and at least 20% equity in your home makes this much easier, homeowners with bad credit can still explore some options.
- Request a lower rate – Many banks offer ‘new’ customers a more competitive introductory interest rate on their home loans, and existing customers who have held their mortgage with them and have a good repayment history should consider asking their bank to ‘match’ this rate.
- Take on extra work – Working available Over Time hours at your current job or getting a casual position elsewhere to increase your cash flow in the short term is a great option when there is no more room for a reduction in expenses. For those who are able, it can make a huge dent in reducing your mortgage and relieving financial burdens while pressures are high.
- Sell unnecessary items – Many households have things they no longer want or need – not to be confused with treasured or sentimental items! Appliances, equipment, clothes and furniture are a good example and can generate extra cash whilst de-cluttering. You may even have more vehicles than you really need, which come with their own running expenses.
- Subletting spare rooms – While this option won’t be appropriate for every household, renting out spare rooms or unused storage space is something that can help you meet mortgage repayments and save extra money if other options aren’t available. Young homeowners, older retirees and families are increasingly moving back in together to reduce living costs. However, there are things to consider when it comes to sub-letting such as legalities and tax.
No matter what, ask your mortgage broker and bank for help with mortgage rates
If you’re struggling financially and are having trouble meeting your mortgage repayments, it’s important that you don’t delay in contacting your lender to let them know. It’s in the best interest of banks and lenders to help their customer’s service their loans, and supports exist in the form of hardship assistance and payment plan adjustments. You can also access free and confidential financial counselling to assist.
Having a chat with your mortgage broker to discuss your options around getting a better rate and conditions on your mortgage is also essential, and a great broker will see your financial situation as a whole and may be able to identify other ways to reduce overall debt and stress.
Newy Finance helps a diverse range of clients with different situations when it comes to brokering home loans and personal loans, mortgage refinancing, personal loan refinancing and debt consolidation. This all works to lower financial burdens and assist them in getting ahead on their goals.
If you’re wanting to enter the property market, want to make sure you’ve got the best deal or are struggling with your current loans – call Newy Finance and Jon will help you figure out what the next steps are to get where you need to be.
Disclaimer: The information provided on this site and associated social media accounts is general in nature and is not to be considered personalised financial advice. It is provided as a general guide to the purchase of property, property finance, home loans, personal loans, loan refinance and debt consolidation services.
All information provided on this site and associate social media accounts has been given in good faith, and considered accurate at the time of posting based on data from credible sources. As the conditions of lenders and financial law is subject to change – sometimes without being subject to notice – we advise that you seek professional and personalised financial advice before agreeing to a loan or other financial services.