The Reserve Bank of Australia (RBA) hiked the cash rate by 0.25% earlier this month to 4.35%. Most of the banks have followed through and made decision to increase variable rate by 0.25% on existing home loans. This means if your mortgage is on variable rate the repayment is on the way up.
How much extra interest will you be paying with 0.25% rise?
Please see below table so you can understand how much extra interest you will be paying per month based on the loan balance with this 0.25% increase.
$400,000 ($84 per month)
$500,000 ($105 per month)
$600,000 ($125 per month)
$700,000 ($146 per month)
$800,000 ($167 per month)
$900,000 ($188 per month)
$1,000,000 ($209 per month)
As you can see with interest rate rise, home loan repayments goes up too. Below are some tips to prepare for future rate rises.
Manage Expenses and Budget
As the rate has been on rise and may go up again, it will be good to see what other areas you could reduce expenses. For example review your bills, when was the last time you have reviewed your energy, internet, gas bills etc. There are many websites to compare pricings on almost everything. Other regular expenses you can monitor and compare are groceries, insurance, subscriptions.
The moneysmart gov website has budget planner that will help you to track where your money is going. This can be very useful tool and take around 20 minutes, we suggest you use this tool to budget.
https://moneysmart.gov.au/budgeting/budget-planner
Pay extra on your home loan
There are several options for you to make repayments on your home loan. Most loans are setup on monthly repayment. If you can manage you can setup little extra regular payments to reduce the term of the loan. For example, if you have a mortgage of $500,000 with an interest of 6.00%, you will be paying approx. $3000/month for 30 years. If you mange to pay extra $100/week on top of your monthly repayments you could reduce around 8 years of the loan term, i.e. the mortgage will be paid out in around 22 years.
Use offset account or redraw home loan account
Redraw facilities and an offset account are two home loan features that serve similar purposes. Both give you way to use spare funds to reduce interest charges on your loan balance – but it’s important to understand the differences before you choose one or the other.
Redraw – A redraw facility gives you the ability to make extra repayments in addition to your minimum weekly, fortnightly or monthly home loan repayment. These additional funds can be taken out – or redrawn – if you need them for holiday, home renovations or to cover an unexpected expense, for example.
The money in your redraw facility counts against the balance of your home loan, which lessens the amount of interest you pay. It’s effectively a pool of funds comprising your extra repayments that sits in your home loan account on top of the balance. Keep in mind that these extra funds kept on your loan balance will reduce with regular repayments over time.
Offset – An offset account, on the other hand, is a separate transaction account that’s linked to your home loan. You can use it as your everyday bank account, with easy access to your funds and the ability to make deposits and withdrawals whenever you want to. It also gives you the benefit of potentially reducing interest payable on your home loan.
Any money you have in your account is ‘offset‘ against the balance of your home loan, meaning you only pay interest on your home loan balance minus the balance of your offset account. As interest is calculated daily and charged monthly, the more money you keep in your offset, the less you pay in interest. But that also means that as your balance rises and falls, so does the amount it can reduce the interest on your home loan.
Borrowing Power
Borrowing power also known as your borrowing capacity is the amount of funds that the lender will lend you. Higher interest rate or rate rises means that your borrowing power will reduce. To keep in simple terms, lets say today you could borrow maximum loan amount of $700,000 with loan repayment of $4311 per month, however if rate goes up by 0.25% , repayment will go up to approx. $4425/month, i.e $114/month extra. This means with rate rise you could not afford to borrow as much as you could as when interest rate were lower
Speak to us to compare rates and discuss options
It has been worrying time for many home buyers and mortgage holders with regular interest rate rises and possibility for further rate rises. Interest rate rises is outside our control and something we cannot stop. But what you can do is follow above steps to be on top of your finance. Here at Draw Equity we do our best to assist our clients to be on top of your debt and mortgages. We compare interest rates/fees and charges against Australia’s most of the lenders and provide you with options to reduce repayments. If you and/or your friends and family need guidance regarding anything about mortgage products please contact our broker Anup directly on 0415 900 264 or pass on his details.
Draw Equity Home Loans
Anup (anup@drawequity.com.au)
