The past year has been a tough one for many households, with interest rate rises occurring every month since May from 0.10% all the way up to 3.10% in December. The flow on effect has been home loan lenders have increased variable interest rates accordingly, with repayments increasing every month across the year.
How can households tackle interest rate rises on their home loans?
One of the biggest things households can do right now is to try and pump extra repayments into their savings or offset accounts. By doing so, they’re paying their future self and setting those funds aside for the very real chance of even higher interest rates throughout 2023.
Most borrowers don’t tend to max out their borrowing capacity, with good incomes and low unemployment, most households are in a good place to keep putting aside funds on top of their repayments. Discretionary spending is also something that most people will need to drop back to ensure their essential spending is covered – this likely means less food delivery and more home cooked meals.
If you’re struggling, there are a number of options ranging from asking your bank for a better rate, to seeking hardship support as a worst case scenario. A mortgage broker is a great tool for borrowers to utilise – at Entourage we’ve helped out clients save over $1M in interest this year alone, just by negotiating with their lenders.
Some borrowers are now facing mortgage prison
There is some relief in sight with CBA, NAB and ANZ all tipping rate rises to peak 3.85%. Unfortunately this will mean some borrowers are going to find themselves in a difficult position.
Last year, banks were assessing serviceability at 2.50%, this means they took their current variable rate and added 2.50% to determine whether borrowers could afford the repayments if rates were to increase. Since then, the RBA has increased rates by 3.10%. This means the buffer the banks applied when assessing the loan has already been eaten up by this years’ rate rises. The problem some will face is when they try to refinance. The banks will now add 3.00% on the standard variable rate bringing their assessment rate close to 8.00% which is not going to pass the sniff test for some people who may have borrowed at the top end of their capacity.
There will also be a number of homeowners who took out fixed rates in the last 2 years who locked in at 1.99%. When their fixed rates expire over the coming 12 months or so they are potentially looking at a rate environment of around 5.00% or more. This means their loan repayments are going to jump substantially if they go onto the standard variable rate. A home loan of $800,000 (P&I, owner occ, 28 year loan term) who was paying 1.99% p.a. would see an increase of $1,321 per month in their repayments if they jumped straight up to a 5.00% p.a rate (from $3,108 pm to $4,429 pm).
What can borrowers in these situations do? The best thing they can do is to start talking to their mortgage broker and lender early. If they are concerned with affordability, there are measures that can be taken to help ensure repayments can be met. This includes repricing the interest rate with the lender, putting as much money as possible in their offset account to reduce the principal loan balance the interest is being calculated on and in some cases (though not always ideal) extending loan terms, consolidating debt and making lifestyle changes.
Where will interest rate rises go in 2023?
Here’s what the big four bank’s are forecasting for for next year:
- CBA: 3.10% by December 2022, then dropping to 2.60% by December 2023
- Westpac: 3.85% by May 2023, then dropping to 2.85% by November 2024
- NAB: 3.60% by March 2023, remaining steady into 2024
- ANZ: 3.85% by May 2023, then dropping to 3.50% by November 2024
And what about inflation?
Inflation is the problem the RBA is trying to tackle. The RBA are predicting peak headline inflation to be now, the end of 2022 before beginning to decline in 2023. This should mean interest rate rises can taper off and ideally, the RBA will hold rates steady through the back half of 2023.
As Damien Roylance mentioned here, just because rates aren’t going up every month doesn’t mean they will be coming down again any time soon.
It’s important to stay on top of your rate and your lender. If you want to have a chat about what’s available for your home, tap the button below and your broker will be in touch.