Australian mortgage holders have been given five ways to soften the impact of interest rate rises after the Reserve Bank of Australia lifted its cash rate to 4.6 per cent.
The increase, from 4.35 per cent, takes the rate to its highest level in 15 years and is expected to add about $91 a month to repayments on a $600,000 mortgage. The RBA has also indicated that further rises could be possible.
Financial expert Rachel Cole told Sunrise that borrowers should first contact their lender to ask whether their mortgage could be repriced.
Ways to soften mortgage interest rate rises
She recommended researching comparable loan offers before making the call, so borrowers know what rates are available elsewhere.
“Even a 0.1 or 0.2 per cent drop can represent thousands of dollars, and you want to be making that phone call from an informed position,” she said.
If a lender refuses to reduce the rate, refinancing may be an option. Cole said the process involved paperwork and was “credit critical”, recommending that borrowers speak to a mortgage broker who could compare lenders.
She said refinancing could help borrowers avoid the “loyalty tax”, arguing that banks often offer better deals to new customers than existing ones. Some lenders also offer cashback of between $2,000 and $3,000 to new customers, she said.
Borrowers with offset accounts or redraw facilities were advised to use them as effectively as possible. Cole said money held in an offset account provided a guaranteed, tax-free return equivalent to the mortgage interest rate.
She suggested having wages paid into the offset account and allowing bills to be paid from it, so cash remained there for as long as possible and reduced the interest charged.
Fixing a mortgage rate could provide greater certainty, although Cole cautioned that it was not necessarily a way to save money. Borrowers would benefit if rates rose after fixing, but could lose out if rates fell.
Fixed-rate loans cannot be linked to offset accounts, she said, and borrowers should speak to a mortgage broker about whether fixing was suitable for their circumstances.
For people struggling to cover both the principal and interest, temporarily switching to an interest-only loan could reduce repayments. Cole warned, however, that the extra cash should be used to ease future pressure rather than fund additional spending.
She said borrowers should instead consider increasing their income or reducing expenses, with options including taking on extra shifts, working overtime, seeking a promotion or renting out a spare room.
Cutting household costs could also help, including reviewing bills, cancelling unnecessary subscriptions and reducing spending on conveniences such as Uber and Uber Eats until interest rates begin to fall.
