Interest rates are a big factor in each loan repayment and the total cost over the life of that loan, so staying on top of your current rate, as well as the interest trends across the market, is essential.
We have seen the Reserve Bank increase the cash rate nine times in the last 12 months, totalling a rise of 3.25% in base rates. If you have not checked your rate lately you need to!
Increased rates have caused a significant reduction in everyone’s borrowing capacity at banks. For existing homeowners, this may mean that you would no longer qualify for the loan you already have in place. With that in mind, you may consider yourself fortunate to have acted when you did.
On the other hand, refinance may now be impossible: You would then be, in effect, in “mortgage prison”; locked into your current loan.
Don’t panic though. Part of the ongoing service to you from your broker is the regular review of your loans. Where refinance is not an option, it just means your broker must work harder at getting you the best rate at your existing bank!
It is also important to note that brokers work with multiple banks, each with a different ‘servicing’ calculator. So, one bank saying ‘No’ does not necessarily mean all banks will give the same response, nor does it necessarily mean you cannot afford the loan.
Banks add 3% to current rates when undertaking assessment. So, when rates were at 2.5%, the bank assessed loans at a rate of 5.5%. Following the 3.25% rise that same loan would now be ‘bank assessed’ at a rate of 8.75%
It is not our opinion (nor that of any reputable economist) that actual rates will be going that high any time soon. My expectations are that we are near the top of the rate rise cycle. There should be a time of relative stability, with 2024 currently considered more likely to see rate decreases than rate increases.
Banks assessing loans at such a high rate suits the current economic environment, where the RBA wants to dampen the economy to decrease inflation pressures. It does not mean rates are expected to go to that level in this cycle.
Rate increases have been substantial.
Different people will be affected by the rate changes in different ways.
The increased ‘cost of finance’ has created opportunity for those in a healthy financial position. Properties can be purchased at prices below what they were previously, and banks are competing strongly for business, with special deals on offer.
For those still enjoying low fixed rates – look ahead, start budgeting for the higher repayments to come.
Unfortunately, many are already feeling the pain of higher repayments impacting their standard of living. First advice remains budgets. Write down where all expenditure goes, be accountable to yourself and your family.
Refinance can often be an option to assist lowering repayments, speak to your broker.
Most important for everyone is to plan ahead. Think about your choices, and most importantly do not allow yourself to be paralysed by stress or worry. Yes 2023 will be a tough year financially for many. However, if you have your job and income, the allocation and management of how that income is spent is your choice.
Stress and worry is not productive unless it stimulates action. In the words of Shantideva, an 8th-century Indian Buddhist philosopher:
“If you can solve the problem, then what is the need of worrying;
If you cannot solve it, then what is the need of worrying”
Integrity Finance Australia has been serving the community since 2006. Call us on (03) 9511 8883 or email support@ifafinance.com.au.