As banks raise interest rates, Aussie mortgage holders are searching for practical ways to soften the blow.
The RBA lifted the cash rate last week to its highest level in 15 years, taking the rate from 4.35 per cent to 4.6 per cent.
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The hike places Australia at the second-highest level among developed nations and will add about $91 a month to repayments on a $600,000 mortgage, with the RBA signalling further rises could be on the way.
As Australians battle with the added costs, financial expert Rachel Cole joined Sunrise on Tuesday with steps that can be taken to help ease the financial burden.
Repricing your loan
Cole said the first crucial step was picking up the phone and discussing costs with the loan provider.
“We’re not talking about paperwork or pay slips here. We’re just giving the bank a ring and asking them to lower your interest rate,” she said.
But before doing that, Cole recommended using comparison sites to do some research on what is available first.
“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.
Investigate refinancing
If the bank does shoot down repricing, Cole said refinancing is an option but it does involve paperwork and is “credit critical”.
“The easiest way to do that is to chat to a mortgage broker, and they will have a panel of lenders, and they can find the best one for you,” she said.
“This helps you beat the loyalty tax, because with banking, banks tend to look after their newer customers better than the old ones. So we’re going to work that in your favour.”
She also noted some banks offer a cashback of $2000 to $3000 just for signing up.
Utilising offset accounts
Many Australians are feeling the pinch, even those already on a “good” interest rate.
Cole said many Australians are struggling to meet payments, and recommended making good use of offset accounts and redraw options.
“Every single dollar that’s in there is giving you a guaranteed tax-free return of your interest rate,” she said.
“If we’re in a high interest rate environment, which we are right now, and if you’re in a high tax bracket, which a lot of people are, the offset account is an amazing use of that money.
“Make sure that the pay goes in there from day one to make sure that you’re offsetting your interest for as long as possible, and then your bills are being paid out of that offset account to maximise the length of time that your cash sits in there.”
Locking in your rate
Locking in a fixed rate could be a helpful tool but Cole noted this is more about certainty than savings.
“If you fix and rates go up, you win because you’re benchmarked at that lower rate, but if you fix and rates go down, then you lose,” she said.
She did note that fixed debts can’t be offset and recommended speaking to a mortgage broker about what’s appropriate in each specific situation.
Interest-only payments
If you’re really struggling to meet principal payments and interest in the current climate, refinancing to an interest-only loan for a period of time may be possible.
However, Cole said it was “really important” to ensure those reduced payments are being used to soften the blow down the line rather than being used now to create extra spending money.
“Instead of switching to interest-only, I’d prefer them to generate cash flow another way, which would be either to get your income up or your expenses down. And that’s easier said than done,” she said.
“It could be taking on extra shifts, overtime, pursuing a promotion, renting out a spare room, or even easier things at home like optimising your bills, doing a subscription audit, or even cutting some of those conveniences like Uber and Uber Eats, just until the interest rates start to come down a little bit. Tightening the belt until things ease up.”
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