Interest rate hikes are causing mortgage stress – but a financial adviser has advice for anyone looking to save big bucks.
Following the Reserve Bank of Australia’s (RBA) first interest rate hike in more than a decade, rising mortgage costs are worrying many Australian homeowners. And for good reason.
After record Australian borrowing levels, record interest rateand the dizzying growth in house prices over the past two years due to the Covid pandemic, many mortgage holders feel more exposed than ever.
ABS data shows the average mortgage size in New South Wales is $805,675. On a mortgage of this size over a 30-year term, a 1% increase in your mortgage interest rate means an increase in your repayments of $449 per month, which equates to an additional $161,746 in total interest over the life of your loan.
You can see from these numbers that getting your rates right can be very profitable.
But in light of the recent interest rate hikes and with more possibilities, is now a good time to take out a fixed rate mortgage? And how can you best prepare for the interest rate hikes that will eventually be felt?
Beating the banks is hard
In Australia the banks have huge teams of analysts, economists and market experts who constantly focus on how the bank should price its fixed rate mortgages to ensure that they remain profitable for the company.
As for the basics on how do these mortgages work, it should be noted that banks generally seek to price them so that they will earn the same amount of money whether a customer is using a fixed or variable interest rate mortgage. They don’t always succeed, but history shows us that banks succeed more often than they fail.
The implication is that it’s really hard to “beat” the banks when it comes to fixing your mortgage. But fixing your mortgage isn’t just about beating the bank. There are significant benefits that come when you fix your mortgage.
With a fixed rate mortgage, you are certain of what your mortgage payments will be for a set period of time. It gives you the ability to make a clear, informed decision about your mortgage and the other things you do with your money outside of your mortgage.
It can give you peace of mind and go a long way to reducing stress on your ability to comfortably fund your mortgage payments and do the other things you want with your money.
Having a fixed rate mortgage should also give you plenty of confidence to pursue other investment strategies outside of your property, such as buying stocks, super investing, or building up your emergency fund or cash savings.
Rate hikes have been priced in
Right now, banks have seen the writing on the wall around interest rate hikes and have incorporated some of those hikes into their fixed rate mortgages.
According to recent data from Finder, the current average fixed rate is 4.06%, compared to 3.33% for the average variable mortgage interest rate. This means that if you are planning to fix your mortgage, you should be prepared to pay a higher rate in the short term.
So how do you know if repairing your mortgage is the right decision for you?
Step 1: Understanding Your Mortgage Repair Costs
The first step on this path is to consider what it would cost if you had to fix your mortgage tomorrow. You can use an online comparison site or speak with your mortgage broker or bank to confirm what your new monthly mortgage payments would be.
2nd step: Assess how it fits your budget
This next step is obvious, but some mistakes people make here can lead to problems. Take the time to decompress your budget and your savings plan, the money that comes in, what goes out and what remains.
In doing so, you’ll want to make sure the expense side of things is rock solid. It’s common for people to overlook expenses that are important to them, which can give you the mistaken impression that you have more money left than you actually have.
Take the time to think about the less frequent expenses you spend, car and home maintenance, medical expenses, travel expenses and anything else that is important to you to make sure the money is there for those expenses whenever you want. .
Then it’s time to look at how much you have left to save and invest. This money is what will drive your wealth building progress over the next few years, so you will want to have enough to meet the goals or targets you have in mind.
Once you are confident in your numbers, you can then examine the impact of changing mortgage costs. Look at your mortgage repayments if you had to fix and how that relates.
In addition to just looking at the impact of a fixed rate, you should also test your variable rate, looking at how your monthly mortgage payments would change if your interest rate were to increase by 1-2%.
Based on the results you get during this process, if it looks like fixing your mortgage would create financial pressure, you should exercise caution. But, if you’re looking at your scenario of rising variable rates and it’s putting you under pressure, looking to fix some or all of your mortgage might be a more comfortable path.
Make your choice (quickly)
The mortgage market is changing rapidly, which means the interest rates you can access today might not be there tomorrow. Interest rates today are on the rise, so if you make the decision to lock in your rates, you need to act fast to lock in what’s on the table.
Having a fixed rate mortgage can sometimes save you money, but they always give you certainty. This path isn’t for everyone, but with record borrowing levels and rising interest rates, it’s worth a close look.
Fixing your mortgage is a decision that will impact your financial situation for years to come, so be sure to plan smartly and get help if needed.
Ben Nash is an expert finance commentator, podcaster, financial adviser and founder of Pivot Wealth www.pivotwealth.com.au, and author of Amazon bestseller ‘Get Unstuck: Your Guide to Creating a Life not limited by money”. www.getunstuckbook.com.au
Ben has just launched a series of free online financial education events to help you get ahead financially. You can check all the details and reserve your place here.
Disclaimer: The information in this article is general in nature and does not take into account your personal goals, financial situation or needs. Therefore, you should determine whether the information is appropriate for your situation before acting on it and, if necessary, seek the advice of a financial professional.
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