The RBA might have paused its carnival of rate hikes this month but that’s no consolation for anyone with a big mortgage and a variable rate home loan.
Even before the April decision, they’d increased the cost of an average mortgage by over $12,000 a year and a $1 million mortgage was up by around $20,000.
That hit is gradually flowing through to household budgets as 800,000 fixed rate loans expire during 2023 and revert from around 2 per cent to around 6 per cent per annum.
Some of us have put money aside but how much and how long can it last? What are your options if your housing costs go up by thousands and your savings start to run out?
Call them and say this
If you’ve never just picked up the phone and asked for a better rate, you might be surprised how often it works.
Ideally, get yourself some leverage first. Check a comparison site such as Canstar.com.au, RateCity.com.au or Finder.com.au and make a note of what the lowest advertised rates are right now.
As I write this, Bendigo Bank is offering a home loan with an offset account for 4.97 per cent per annum. Queensland Country Bank is offering three years fixed rate for 4.99 per cent per annum.
Especially if you have over 20 per cent equity in your home, and your mortgage is for a large amount, that makes you the Chris Hemsworth or Margot Robbie of mortgage customers – you are very attractive!
So call your lender and use this script from my book Easy Money, which has already save some readers thousands of dollars:
‘Hi, my name is _______ and I’ve been a customer for ______ years. I’ve just noticed my interest rate is _______% p.a. and there are now rates out there of 4.97% p.a. with Bendigo Bank and 4.99% p.a. Fixed for 3 years with Queensland Country Bank. So I’m planning on switching – especially given I own over 20 per cent of my home and I’m borrowing a large amount so I’m confident I’ll be able to get an extra rate discount. But I just thought I’d make one call to see if you can match it before I request a mortgage discharge form. What’s the best rate you can offer me to stay?’
There’s recent evidence that banks are offering discounts of as much as 100 basis points to keep existing customers who play hard ball – either themselves or via a broker.
Some of us will be what’s called ‘mortgage prisoners’ this year, which means we can’t re-finance or switch because we can no longer borrow the amount we need at the higher rates. But your lender may not know this unless they do a new serviceability assessment, so you can still try it on.
Switch!
If your bank won’t play ball and you’re not a mortgage prisoner, you need to be prepared to walk away.
There are 2370 Australians are re-financing every day at the moment, and 70 per cent of them are switching lenders.
There’s a war on for our business and that means you can make big savings if you’re a switcher.
There are also cashback deals up to $5000 currently on offer – but bear in mind that a low rate for 25 years is worth much more than a one-off cashback upfront.
Slash your spending
I’m not talking about Mickey Mouse moves like taking your lunch to work or saying goodbye to barista coffee. That might have worked in 2018 but as I’ve written before, in 2023 we need to consider more radical savings strategies.
If you need to save thousands of dollars, you might have to say goodbye to private health insurance or private school fees, or sell a car, or cancel an overseas holiday.
None of these sacrifices are easy or ideal but for thousands of Australians they will be necessary this year – or at least preferable to selling their home.
Just be aware of the consequences: for example, you might have to pay extra Medicare Levy at tax time if you dump your health insurance. So maybe asking for a suspension of your policy for 6 months is a better move for starters.
Go interest-only
The average interest-only loan is about 0.7 per cent higher than principal and interest loans, so you’ll pay more interest.
But going interest-only temporarily will mean your repayments on an average $600,000 loan drop by about $7000 a year, which will get some borrowers through the coming year or so before some economists predict rates could start to drop again.
Your lender might say no, but it never hurts to ask.
Speak to the hardship department
Every lender is required to have a ‘hardship program’ and if you need it you won’t be Robinson Crusoe this year – they’ll be busy. Make sure you talk to them if you’ve missed a repayment or you’re likely to.
They might offer to extend your loan over a longer term to get the repayments down (this will cost you more over time but might save you in the short term).
Or they might give you a break on repayments for a period as many did during the COVID-19 pandemic. Mortgage repayment holidays no longer automatically damage your credit score. Lenders must record ‘on-time payments’ in each of the months they are paused. Instead, it is just noted on your credit record that you have a hardship agreement.
ASIC Moneysmart says these are the steps you need to apply for a ‘hardship variation’:
- Contact your lender or credit provider – by phone or in writing.
- Ask to speak to a ‘hardship officer’ or to ‘customer service’.
- Give the details of your loan (account name and number, and the amount you pay each week/fortnight/month).
- Say that you want to change your loan repayments because you are experiencing hardship (as set out in section 72 of the National Consumer Credit Code).
- Explain why you are having difficulties making payments, how long you think your financial problems will continue and how much you can afford to repay.
The Financial Rights Legal Centre also creates sample letters you can use as a template.
If you are not satisfied with the lender’s response you can contact the Australian Financial Complaints Authority at afca.org.au or on 1800 931 678.
Sell
Some of us will have to. It’s not the end of the world. You’ll be back to fight another day.