By Guest Blogger, Louisa Sanghera, Principal Broker,
Zippy Financial
With the official cash rate now at an 11-year high of 4.1%, many mortgage holders are feeling financially stressed. Most major banks have adjusted their forecasts to expect one or two more rate rates in the next few months – and the question is, will this be a major tipping point that could lead to more mortgage defaults and distressed selling?
There’s no doubt that with the RBA raising interest rates again in June, it’s putting a vast number of borrowers on edge, as their repayments have risen so dramatically.
Inflation rates are still stubbornly high, and the cash rate is the only tool in the RBA’s arsenal to try and reign it in. So many mortgage holders are already struggling to cope with the run-of-rate increases we’ve had so far, let alone any more that might be introduced.
If this is your situation, you might be wondering: to what extent are other homeowners able to absorb any more interest rate increases?
This is the type of question my team and I are hearing on repeat at the moment. As a finance broker, I work with my clients to restructure their debts and steer them towards the home loan/s that best suits their situation. Here are some of the options we review to help people survive this current economic client:
Refinancing to a cheaper interest rate
Refinancing is the obvious first step for most people. If you’ve had your loan for a few years, there’s a good chance there’s a better value deal out there, which could help you save hundreds of dollars a month.
That said, your borrowing power has changed a lot since all of these rate rises were introduced. A couple with no children earning $150,000 combined were able to access lending of up to $1m at the beginning of last year, when variable interest rates were around 2%.
Now, with variable rates sitting at around 5.5% to 6%, that same couple can borrow around $700,000. That’s a $300,000 difference – which can make all the difference between your loan being approved or not.
Shopping around for a better buffer
In response to current market conditions, a number of banks are changing their home loan serviceability rules when it comes to the interest rate buffer.
Typically, most banks will apply a 3% buffer on top of your interest rate to “stress test” your mortgage. Regulators say this figure is “appropriate” to protect borrowers from economic uncertainty and risks. This means a loan with an interest rate of 5.5% will be stress tested at 8.5%, to make sure you can still afford the loan if it increases.
This 3% buffer is being reduced by some banks. For instance, Westpac have launched their new “Streamlined Refinance”, which is available to customers with a credit score of at least 650 and a good track record of paying existing debts in the last 12 months. If you don’t service with the 3% buffer, you may be eligible for assessment against a lower percentage. This applies to refinance applications with Westpac and its subsidiaries, St George, Bank of Melbourne and BankSA.
Commonwealth Bank is also cutting the interest rate stress test for borrowers refinancing their mortgage – from 3% to just 1%. The lower buffer will only apply to refinancing applications who have not missed any repayments in the past year, whose loan is at least 1 year old and where the loan is less than 80% of the property’s value.
Reviewing your overall situation
To avoid falling off the fiscal cliff, it’s a good idea to look at all of your debts and what your options are to restructure them.
For instance, let’s say Amir and Susie have:
• a home loan for $700,000 taken out 5 years ago @ 6% = $4,197 per month
They’ve repaid $100,000 of the principal, down from $700,000 to $600,000
• a car loan worth $20,000 @ 9% with 3 years remaining = $416 per month
They’ve repaid $8,000 of the principal, down from $20,000 to $12,000
• credit card debt worth $13,000 = minimum repayment $390 per month
In this scenario, Amir and Susie have a number of repayments to juggle each month with a total value of $5,003. They could aim to refinance to consolidate them all into one streamlined mortgage repayment. Even if the home loan interest rates stay the same at 6%, the new, lower overall debt level will translate to lower, more manageable monthly payments:
$600,000 + $12,000 + $13,000 = $625,000 @ 6%
New repayment = $3,750 per month
While some borrowers have sufficient buffers in place to cope with even more interest rate rises, the majority are struggling to manage such massive increases to their household budget.
With hundreds of thousands of borrowers set to transition from very low fixed rates to much higher variable rates over the next six months, even more borrowers are heading toward financial danger.
If you’d like help to use some of the above strategies to increase your buffer and manage higher interest rates, reach out to a qualified experienced mortgage broker.
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