What the RBA rate hike means for you
Canstar crunched the numbers and found May’s 0.25% rate hike will add around $88 per month to the repayments on a $645,000 home loan – the median mortgage nationally.
If you have a $500,000 loan, you’re looking at about an extra $68 each month. At the higher end of the scale, on a $1 million mortgage, you could be up for an extra $136 in monthly repayments.
Rates starting with a ‘1’ are still available
The big four banks, which between them account for 77% of home loans in Australia, were all quick to raise their variable home loan rates.
But very low rates can still be available.
Some of the cheapest loans are with Pacific Mortgage Group (1.79%) though you’ll need 40% in either a deposit or home equity to be eligible. Or check out Reduce Home Loans (1.79%), which only requires 20% deposit/equity.
Locking into a fixed rate is a step worth thinking about especially if any further rate hikes would seriously stretch your budget.
Australian Mutal Bank has a competitive 3-year fixed rate of 3.28%. Sure, it’s higher than some of the lowest variable rates, but it could be just a few rate hikes away from being a money saver.
What if you’re on a fixed rate?
Anyone currently on a fixed rate is spared the rate hike – for now at least. However, plenty of homeowners will reach the end of a fixed term in the months ahead.
CommBank data shows $19 billion worth of the bank’s fixed rate loans will expire in June. By the end of 2022, an additional $25 billion will be rolling onto a variable rate.
If that sounds like you, it’s important to ask your lender about the variable rate the loan will revert to. Then shop around to see if you could do better or speak to your mortgage broker.
If it turns out you could score a lower rate by refinancing, it’s important to have a clear picture of your home equity. That’s the difference between your home’s market value and the balance owing on your mortgage.
As I mentioned, competitive rates and even cashback incentives are available to refinancers. But if you have less than 20% equity, a new lender will ask you to pay lenders mortgage insurance. The premium can run into thousands of dollars, potentially wiping out any savings of refinancing.
To be sure refinancing puts you ahead financially, compare the costs of switching with the savings you’ll make. The sooner you can recoup the costs the better.
As a guide, if it’s going to cost $800 to make the move but you’ll save $120 in repayments, you will have recovered the cost in just seven months. From there, you’re pocketing pure savings.
If you do decide to refinance, it’s a good idea to explain to the lender or broker that you want to stick with the same remaining term you have on your current loan. The default term for many lenders these days is 30 years, and while dragging out a loan term will lower your regular repayments it can dramatically raise the overall interest cost.
The upshot is that for most people, the May rate rise is no reason to panic. But for some homeowners the pain is real.
I’m thinking of those who purchased a home with a very low deposit at the peak of the property boom – and whose property has since dropped in value. If you’re in this position, get in touch with your lender promptly if you think it could be a challenge managing higher loan repayments.