3 ways to cope with higher repayments after the RBA November rate hike

The Reserve Bank of Australia (RBA) hiked the cash rate by 25 basis points to 4.35% at its November meeting this month, meaning that Aussie borrowers will see variable rate home loans get even more expensive. If your finances have been stretched by the past year’s series of rate rises, Canstar’s finance expert Effie Zahos has some strategies that may help ease the burden. 

While the RBA held the cash rate steady for the past several months, all four of Australia’s big banks predicted a November rate hike, and this came to pass today. The cash rate is now 4.35%.

Governor Michele Bullock hinted this increase was on the way, recently saying the bank would do what was necessary to keep inflation in line, but the announcement is likely to sting for many home loan borrowers.

When the RBA raises the cash rate, banks and lenders tend to follow suit by raising their home loan interest rates. A Canstar survey of 893 Australian mortgage holders in October found just 31% of borrowers felt confident they could continue to make loan repayments if interest rates were to rise again, leaving 69% of mortgage holders in a more precarious position than ever.

Rate rises see monthly repayments go up by thousands

According to Canstar research, a 0.25 percentage point increase in the cash rate could add $99 to repayments for a borrower who bought a home just before rates began to increase, and borrowed an average loan amount at the time of $611,154. This would have seen monthly repayments rise from $2,570 in April 2022 to $4,137, a total increase of $1,567 or 61% since the current rate rise cycle began.

“Those who bought a home in New South Wales could see their repayments jump to $5,321, which is a massive $2,016 more than they were in April,” said Effie Zahos. For those who are wary of the prospect of even more expensive variable rates, Zahos suggested some strategies that may help ease the financial stress facing some borrowers.

What can you do if you’re facing home loan stress?

“Homeowners in financial stress have three main options that could buy them some relief in the short term,” said Zahos. “These simple strategies have the potential to more than cover the increase in repayments if rates rise in November.” These options are as follows:

1. Consider switching to a low one-year fixed rate

“Someone with a $600,000 mortgage at the average variable rate of 6.68% could potentially save as much as $457 by switching to the cheapest one-year fixed rate on Canstar’s database at 5.50%, available to borrowers with a 60% loan-to-value ratio or less,” said Zahos. “Borrowers who have a loan-to-value ratio of 80% could still score a great one-year fixed rate of 5.70%, which could reduce their repayments by $382 per month.”

2. Consider reverting to interest only payments

Zahos said that reverting from principal and interest repayments to interest-only repayments could be a possibility for short-term relief for borrowers. “On a $600,000 mortgage at the average variable rate of 6.68%, reverting to interest-only payments could cut repayments by $249 per month,” she said. Zahos cautioned, however, that delaying repayments on the principal loan amount will end up costing more in the long run.

3. Consider extending your loan term

As a final option, Zahos said that borrowers could consider extending their loan term by five years. “Canstar analysis shows a homeowner with a $600,000 mortgage who extends a 25-year loan to a 30-year loan could cut their repayments by $255 per month,” she said. “It’s important to weigh up the benefits of extending the loan term given this strategy will see the borrower repaying their debt for longer and paying more interest in the long-term.”

How can you save on your home loan rate?

If your fixed rate home loan is about to come to an end, or even if you think you could be getting a better deal than what you’re currently paying, you can compare home loans with Canstar to see what your options might be, and if there’s a more favourable deal out there for you.

If you are thinking about refinancing your current home loan to a new lender and want to know more about the process and how it works, Canstar has a list of seven mistakes to avoid when refinancing, so you can be better prepared to strike a new deal.

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