Keeping up with your mortgage repayments might soon get harder. Not only is the Reserve Bank likely to raise official interest rates sometime this year, but other costs like petrol, food (even coffee!) are getting more expensive. At the same time wages growth hasn’t caught up.
An interest rate rise could be a massive issue for you if you’ve bought property recently, and aren’t in a secure financial situation. Or rather – you might be in a secure financial situation now, but an interest rate rise would mean that you aren’t.
“The pandemic was a tale of two cities,” says financial counsellor Deb Shroot. “A lot of people fared really, really well, the other half really struggled during the pandemic and are still trying to play catch up on those bills and debts they did fall behind on.”
It’s estimated at least 1.5 million households with a mortgage are already facing financial stress.
But before you start to panic, there are some things you can do now to prepare.
It’s important you really understand what your current financial situation is.
Find out the current interest rate you are paying. Can you afford it comfortably right now?
Do some simple sums (either with a pen and paper or you can use this mortgage calculator) and see if you can still afford it if rates go up. You’re going to want to estimate rate increases of up to 5% (or higher if you’re worried).
To do this, write down your current loan and your current rate. Then, calculate how much you would be paying if rates go up by 1-5% than what you’re paying now. Try to do as many calculations at different rates as you can – it will give you a better understanding of how you will be affected, and
A simple back-of-the-envelope calculation might be this:
Say you have a $500,000 loan and are currently paying 2.44 per cent. Your monthly repayments might be $2,228 per month. If the rates go up to 5 per cent, your repayments would be $2,923 per month (about $700 more per month).
Can you still afford your repayments at these higher rates? If you can’t afford it within your existing budget, read on.
Now let’s look a little wider. What’s your total debt situation?
You might have a mortgage, but do you also have credit card debt, a personal loan, perhaps a HECS debt that you are making repayments on?
“With the expected interest rate rises it’s probably going to impact more than just mortgages,” Ms Shroot says.
“While rates are still low, if you have the capacity, put more money into those debts to try and get them as low as possible.”
Some people like to concentrate on getting rid of the debt with the highest interest rate first. Others prefer paying off the smallest debt first.
It’s worth regularly shopping around to check you’re getting the best interest rate available. Do some research on what other lenders are offering (or you can use a mortgage broker).
Ms Shroot suggests starting by calling your current bank. It’s one phone call that can save you thousands.
“See if the bank is able to offer you a cheaper or a more appropriate product for your loan,” she says.
And remember, you can always switch lenders. Of course, double check if there are any fees or charges associated with switching.
Fixed interest rates got to record lows (under 2%) last year. In many cases variable rates are lower now.
But some people feel that if they lock in a two- or three-year rate now, it may at least give them some certainty in their budget. Rates may go up (or down) but people with fixed loans will know exactly how much they need to budget for throughout the term of the loan.
A big risk with fixed loans is it may insulate you from rate rises now, but what happens when the loan term ends? Will you still be able to afford the higher rate or will you be facing financial stress later anyway?
Are you spending more than you earn?
For many households, the simplest (and most obvious) way to make mortgage payments more affordable will be to cut out any possible excess spending. Take a look through your budget (or your credit card statement). What can you trim or even cut out altogether? Are there any easy substitutions you can make (even if it’s just for a few months)? Are there subscriptions – like magazines, entertainment or even the gym – that you’re still paying for but don’t really use anymore?
“It’s also a good opportunity to renegotiate things like your electricity, your insurances and other expenses that are regular and you may not have shopped around for a while,” Ms Shroot says.
Are you eligible for any utility relief grants to free up money for your mortgage repayments?
Perhaps you could apply for food, transport, phone or pharmacy vouchers from an emergency relief service near you.
Find out about local services on the Ask Izzy website.
If you still can’t balance your budget, it might be worth asking your lender about financial hardship.
You might be able to temporarily pause your home loan, reduce your payments or change the terms of your loan.
“Don’t just continue to pay the lower amount, because it will catch up with you in the end,” warns Ms Shroot. “If you can flag now there is going to be an issue and you won’t have the capacity to pay, there will be options available.”
Some state and territories have mortgage relief schemes that may help. The ACT mortgage relief fund offers interest-free loans worth $10,000 to mortgage holders having difficulty making their repayments (due to things like loss of employment, sudden illness or injury). The Queensland mortgage relief loan also offers short-term help to people in crisis. You can borrow up to $20,000 which is repayable over 10 years.
Of course, make sure you read the fine print and check they’re the right loans for you.
Finally, perhaps it might be time to get some professional help. The National Debt Helpline has financial counsellors who can help you manage your debt. It’s a free service available across Australia (call 1800 007 007). They can advocate on your behalf with your creditors but also help you make some long-term changes to your financial situation.