The official cash rate has gone up eight times this year, but it hasn’t increased Brad and Vicky’s mortgage repayments at all.
Like many borrowers, they locked in an ultra-low fixed rate 2 years ago on their $600,000 mortgage.
However, they are worried about how they will afford an extra $1,000 a month, or more, on their repayments when their fixed-rate term comes to an end.
Start saving to create a buffer
If you fixed your rate under 2% or 3%, you’re laughing all the way to the bank for now; but instead of putting your feet up and enjoying the good times now, it would be a great idea to start preparing for the mortgage cliff while you can.
We suggest working out what your monthly repayments will look like when you roll off the fixed rate and start putting aside that amount now to build a buffer – you can do that by contacting your broker and increasing your repayment by direct debit if your loan allows some extra repayments, or putting the extra in a separate account… either way start living like your rates have already increased just to see how comfortably that fits within your budget.
You will quickly see just how much room there is or isn’t in your budget and what else you might need to change.
Put a negotiation date in your diary
Start thinking about your next steps at least two months before your rate ends
Make sure you get in touch with your Mortgage Broker to help negotiating your new rate, rather than just rolling on to the variable rate specified in your fixed-loan contract. That ‘Revert Rate’ is usually much higher than the cheapest discount rates available.
Despite the tough environment, banks are still keen for business, so there is always room to negotiate better terms. Negotiating with your existing lender should always be the first step as it can offer a great outcome and is quick & easy.
Find out if refinancing is an option for you
Another option is to try and refinance to get a better deal with another lender.
This is probably only an option if you have over 20% equity in your property as otherwise you may have to pay lenders mortgage insurance (LMI) in order to refinance and this is likely to not be worth the exercise.
If the repayments on the current interest rates are a stretch, there are a few tricks that can be used when refinancing to help reduce the repayments you will have on your new loan.
#1 Stretch the loan term
Depending on how long you have left on your home loan, and especially I you have been paying it off for a few years already, we may be able to reset your new home loan to a 30 year loan which will help reduce the repayments.
Of course this will mean that it gets paid off over a longer term however sometimes this is better that not being able to meet the repayments in the first place
#2 Consolidate some debts
If you have some personal debts like Credit cards, car or personal loans or Buy now pay later facilities we may be able to consolidate these into your loan to reduce the overall amount of repayments across these multiple debts. This usually result in one simpler to manage and lower repayment.
Again here you need to consider the fact that these debts would then be paid over a longer term and potentially costing more in interest in the long run.
#3 Convert to Interest Only
If the fixed rate loan that is expiring is on an investment property, then we could look at ‘Interest Only’ options… meaning that for a period of up to 5 years you could reduce your repayments from Principal & Interest to Interest Only saving you in cashflow.
This does mean that you loan balance will stop reducing for that period however it will also reduce your repayments substantially.
#4 Obtain a CashBack
Some banks offer ‘cashbacks’ if you refinance your loan to them – this amount can help you with the cost of moving your loan and also give you a small cash injection to help with paying down a small debt or two.
This should only be seen as ‘cherry on the cake’ however as refinancing for the sole purpose of a cashback could mean seeing you with a less competitive loan which would then defeat the purpose
Here’s what to do if you can’t afford the repayments
If you do the calculations, review your budget and still think you won’t be able to afford the higher repayments, and a refinance wont do the trick either, it could be worth speaking to your lender’s financial hardship team.
The banks consistently advise doing this as early as possible, before you find yourself in severe financial stress.
They can help by waiving fees, pausing repayments or consolidating your debt.
You could also contact a financial counsellor from the National Debt Helpline. They offer free and independent financial advice.
We would love to help you find the best option to put your mind at rest and your finances in order.