Strategies to help you make it to the first rate cut

Worried about how to keep up with the increasing repayments on your home loan? Effie Zahos shares her tips to help you survive until rates start falling again.

The Reserve Bank has hiked up the cash rate for the 10th month in a row. It is now sitting at 3.60% – 25 basis points higher than it was in February and a whopping 350 basis points higher than it was in April 2022, before the first increase.

This has had an enormous financial impact on borrowers. Canstar’s analysis shows that assuming the latest rate rise is passed on in full, someone with a $500,000 loan over 30 years will be paying about $1,051 more per month on their repayments than they were in April. That’s a staggering $12,612 per year.

Increase in home loan monthly repayment due to cash rate increases by loan amount

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Source: www.canstar.com.au. Monthly repayment calculations based on a loan repaid using principal & interest repayments over a total loan term of 30 years. Calculations assume a pre-May cash rate average variable rate of 2.98% (based on owner occupier, variable loans on Canstar’s database, available for a loan amount of $500,000, 80% LVR and principal & interest repayments; excluding introductory and first home buyer only loans), with increases in rate based on applying the applicable increase in cash rate.

Aussies have also had to grapple with the rising cost of living. The monthly Consumer Price Index (CPI) indicator rose 7.4% in the 12 months to January. Feeding our family, filling up the tank and keeping the lights on have all become much more expensive.

Household budgets are definitely feeling the strain – particularly when you combine the pressure from rising rates and the higher cost of living. And it’s not over yet with the major banks all predicting there will be further rate hikes. Commonwealth Bank thinks we are in for just one more rate rise and expects the cash rate to peak at 3.85%. ANZ, NAB and Westpac, however, think the RBA will lift rates by 25 basis points at each of the next two meetings to a peak of 4.1% in May.

What would that mean for repayments? If the cash rate hits 4.10%, someone on a $500,000 loan over 30 years will have to find an extra $166 a month to meet their repayments. That might not seem like much but that’s on top of the $1,051 a month their repayments have already increased.

Plus, a new wave of financial stress will be felt by those homeowners about to roll off fixed-rate loans who will need to play catch up to meet the higher repayments that will now come with variable rates.

On a positive note, if the predictions made by ANZ, NAB and Westpac are right, it will be the end of rate hikes – at least for this cycle.

But what can you do if you are struggling to keep up with your repayments already? It may be a matter of trying to stick it out until rates start falling again – which may be sooner than you think.

Commonwealth Bank expects the RBA will start cutting the cash rate in the last quarter of 2023, while both NAB and Westpac think we will start seeing the cash rate fall in early 2024. ANZ, however, thinks we are unlikely to see rates go down until November 2024.

Here is a guide to what you may be able to do to help you survive until rates start falling again.

Get a handle on your cash flow

The first thing you need to do is sit down and take a close look at your budget. It’s important to get a clear picture of exactly where your money is going and how much you can realistically afford to pay on your loan each month.

This is also an opportunity to identify areas where you might be able to save money. Take a look at all your regular expenses – energy bills, car insurance, home insurance, health insurance, internet, mobile plan(s) – to see if you can get a better deal. You could also ask your current provider if they’d match the better deal so you don’t have to make the switch.

Also, think about other ways you may be able to make some savings. Meal planning and buying things when they’re discounted, for example, can help you reduce your grocery bill. Download a fuel app and make the most of fuel discounts to save money on petrol.

On the other side of the ledger, think about what you may be able to do to bring in extra cash. Could you pick up a side hustle, rent out a room or sell unwanted items? Or maybe you’re eligible for government payments to help boost your cash flow. It’s worth using Services Australia’s Payment and Service Finder to check what you may be entitled to.

→ Related: How to save money – 70 tips to cut living costs

Negotiate a better rate with your current lender

While most lenders tend to offer better rates to new customers, it doesn’t hurt to see if you can negotiate a cheaper rate with them before you look into refinancing. This may even be your only option if you’re a “mortgage prisoner” which essentially means you are unable to refinance your home loan.

Many Aussies are finding themselves stuck in a mortgage prison because they can’t meet the serviceability requirements. Lenders have to place a serviceability buffer of 3 percentage points on top of the advertised rate. So if you applied for a loan with an advertised rate of 4.5%, for example, the bank would need to be satisfied you’d still be able to meet the repayments if the rate was 7.5%. Lack of security can also pose a problem if the value of your property has fallen and your loan to value ratio (LVR) is now above the 80% mark

Before contacting your lender, do some research. It’s important to find out what rates are on offer from other lenders and what your existing provider is offering new customers. When you call your lender you can use that info.

Here are some ideas of what you can say:

• “I’ve been shopping around and have found better deals from other providers. I’d like to talk to someone about what you may be able to offer me.”

• “I’ve been checking how my mortgage rate compares with what you’re offering new customers, and I’m disappointed that my rate is so much higher. What can you do for me?”

• “I saw that you are offering new customers X. How can I take advantage of this offer?”

It may be a matter of switching to a cheaper alternative loan with your lender. For example, if you have a package loan consider switching to your lender’s cheapest offering. Your lender should be able to help you find a suitable option.

Refinance with a new lender

As mentioned earlier, refinancing has become harder but it may still be worth a shot if you’ve had no luck scoring a cheaper rate with your current lender. It can pay to talk to a mortgage broker because they have a better understanding of the market and may know which lenders are more likely to say yes to your application.

I always suggest doing a break-even analysis which will show you how long it will take you to recoup the cost of refinancing. You simply add up all the costs of moving your loan to a new lender and divide it by your monthly saving. Let’s say it would cost you $800 to refinance but you would save $50 a month in repayments, your break-even period is 16 months.

Consider a fixed rate

Another option to consider is fixing all or part of your loan. This can buy you some peace of mind as you’ll have the certainty of knowing what your repayments will be each month for that fixed rate period.

You might even be able to lock in your loan without paying more than the average variable rate which is currently 5.94%, according to Canstar. The lowest one-year fixed rate currently listed on Canstar is 5.04% while the lowest two-year fixed rate is 5.19%. (This is before the March rate hike announcement.)

Before fixing your loan consider what discount is on offer to lock in and how many rate hikes it will take until you will be on par again with variable rates. Keep in mind if you lock in for a long period and rates fall you may miss out on that downward swing.

Understand your hardship options

If none of the above strategies is going to cut it you may want to look into the various hardship options that may be available from your lender. This will be a formal agreement to adjust your loan repayments because you are experiencing financial difficulty.

Here are some examples of hardship arrangements:

• Switching to interest-only repayments
• Extending the term of your loan
• Reducing your repayment amount temporarily
• Pausing your repayments temporarily

Whatever option you choose, think carefully about what you can realistically afford. You don’t want to agree to something that you won’t actually be able to stick to.

Also, keep in mind these are only band-aid solutions to give you temporary relief. They have the potential to cost you more in the long run. It’s vital to understand what will happen when the arrangement ends and how you will catch up on any missed repayments.

Finally, it’s worth noting that when you enter into a financial hardship arrangement it will be reported on your credit report and will stay there for 12 months. It won’t affect your credit score though.

Get some guidance

If you are feeling overwhelmed and think you could benefit from more guidance, consider reaching out to the National Debt Helpline on 1800 007 007 to speak to a financial counsellor. The National Debt Helpline fields thousands of calls each month from people experiencing financial difficulties. You can get free advice over the phone or you may be referred to your closest face-to-face financial counselling service.

Get in touch with your lender

Now that you have a clearer picture of your financial situation and the hardship options that may be available, it’s time to get in touch with your lender. You can call them or if you prefer you can send a letter. You can probably find the relevant contact information on your lender’s website – simply search for “financial assistance” or “financial hardship”.

If you do it over the phone you can say something along the lines of: “Hi, I’d like to request a hardship variation on my home loan. I am finding it difficult to meet my repayments because <insert reason here>. I think I can afford to pay $XXX a month. What are my options? How can you help me out?”

You may be asked to provide additional information about your income and expenses or to provide documents that can support your request for financial hardship.

If you prefer to do it in writing the Financial Rights Legal Centre and National Debt Helpline both provide sample letter templates that you can use. It’s just a matter of filling in the blanks.

According to the Financial Rights Legal Centre, your lender can request further information within 21 days and you must provide any relevant information requested. The lender must then respond in writing within 21 days stating whether they agree to your hardship request.

If your lender says no to your request, they have to give you the reasons why they said no. If you’re not happy with their response, Moneysmart suggests contacting the lender’s internal dispute resolution team. And if you still can’t reach an agreement then you can contact the Australian Financial Complaints Authority (AFCA) to make a complaint.

Consider accessing your super

You may be able to access your super early to help pay your mortgage in very limited circumstances and it’s harder than most people realise.

You may be able to withdraw some of your super early on compassionate grounds if you need the money to make a payment on a home loan so you don’t lose your home. To be eligible, the ATO says you must meet all of the following four conditions:

• The property is your principal place of residence.
• You are legally responsible for the mortgage repayments.
• You have received written advice that your principal place of residence is to be foreclosed, sold or repossessed from your mortgage lender who has provided you with a default notice.
• You have no capacity to pay the money owing.

You won’t be eligible if you have missed your mortgage repayments but your mortgage lender has not issued a default notice or if you think you’ll have difficulty making repayments in the future.

You may also be eligible to access your super early under financial hardship grounds if you have been receiving government income support payments continuously for 26 weeks, and you aren’t able to pay what the ATO regards as reasonable living expenses for your family.

If you go down this route, it’s important to understand the financial impact of withdrawing money from your super. Your balance is reduced and you lose the benefit of compound interest on the sum you have withdrawn. It can be a good idea to talk to a financial counsellor for advice.

Finally, if you feel like you have tried everything and you simply can’t keep making your repayments you may want to consider selling your home. Pausing payments, paying interest only and extending your loan term can all add significantly to your interest bill. In some cases, selling on your own terms may work out better for you.

Cover image source: simona pilolla 2/Shutterstock.com