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Rate Rise May Lead to Sacrifices

Wednesday, 03rd November 2010

The CEO of Australia's largest independently owned mortgage broker said today's cash rate increase to 4.75% is cause for concern, as families may now cut back on necessities to compensate.







Assuming lenders pass on only the quarter of a percent rise, this means an extra:

  • $49.59/month on a 30-year $300,000 principal and interest variable loan that was 6.5%
  • $50.62/month on a 30-year $300,000 principal and interest variable loan that was 7%
  • $51.60/month on a 30-year $300,000 principal and interest variable loan that was 7.5%

Mortgage Choice CEO Michael Russell is disappointed by the move and called on the RBA to now keep the cash rate steady until the holiday period is over.

"Australian families have absorbed enough budget pain recently, due to the higher cost of living from utility bill hikes and the October to May rate rises.  These six loan repayment increases equated to around $300 per month for an average $300,000 loan.  Many borrowers took on even more," he said.

"Today's move will hurt many mortgage holders.  It may even lead to a significant number cutting back on spending that is important to their wellbeing, in order to cope."

To compensate for around $50 less in their pockets each month, borrowers could very well:
  • Reduce or cancel private healthcare cover
  • Cancel one day of childcare
  • Begin to buy less healthy (but cheaper) groceries
  • Cancel their gym membership
  • Cancel or delay insurance payments, eg life, car, home and contents, etc

"The last thing families need in the Christmas lead up is budget stress and the government will not want people pulling out of private healthcareor parents re-thinking full time work because of childcare costs.  The Reserve Bank should keep the cash rate steady for as long as possible," Mr Russell said.

"As for borrowers, what can they do?  First of all, don't panic.  Take a good look at your budget and go from there.  We know that around two thirds of mortgage holders make extra repayments, and now may be the time to use some of that buffer if you need to."

Feeling caught out by rate rises?  Consider these mortgage management tips:

Give yourself a home loan health check.  Consult a reputable mortgage broker to compare your loan options and check if there's a more affordable loan situation that suits you.  Carefully weigh up all options, especially the available loan features, ongoing costs and any fees for refinancing.

Reduce the loan amount in one quick move.  Creating a protective financial buffer by making a lump sum payment now can also knock time off your loan term and reduce the overall interest owed.

Reorganise your repayment strategy.  If you are juggling repayments for multiple debts, consider rolling them into your home loan.  Stretching them over your loan term reduces your total monthly repayment requirement; however, it will see you paying more interest over the long run.

Extend your loan term.  This will reduce your minimum repayment requirement and help in the short term bu you must remember that your loan attracts extra interest during every extra month.

Recalculate to reduce repayments.  Your lender can utilise any additional funds sitting in your offset account or redraw facility by incorporating those dollars directly into you home loan then recalculating it to leave you with your 'true' loan amount.  This lower loan amount decreases your minimum repayment requirement, but remember: what were extra funds are no longer available to redraw.

A fixed rate may help.  If peace of mind over your repayment level is paramount, consider fixing all or part of your loan.  While doing so it is important to keep in mind many lenders have already increased their fixed interest rates to levels higher than most variable rates.  Also, fixed loans usually have fewer loan features and can incur significant break costs.

Call Mortgage Choice customer service on 13 MORTGAGE or, visit www.mortgagechoice.com.au, www.facebook.com/HomeLoanCoach or http://twitter.com/HomeLoanCoach.

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Comment from wilsonking on Saturday, 20th August 2016

So true it's necessary to create a protective financial buffer by making a lump sum payment now which can also knock time off the loan term and reduce the overall interest owed. Thanks. scienceonline

Comment from raghav on Thursday, 14th July 2016

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Comment from webbrowan on Wednesday, 23rd March 2016

Increase in interest rates beyond the mortgage circle also causes families to cut down on necessities in order to make up for the additional costs in other sectors. Hence, families need to always manage their finances well and perform enough research before settling down with the best financial plan which best stay within their means. Should they ever need a car, they should also perform the same steps in order to obtain the best car finance rates which will really help them in the long run.

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