The Reserve Bank of Australia decided in April 2019 to keep the official cash rate (the interest rate it charges on loans it gives to commercial banks) at its record low of 1.5 per cent. This makes it Australia’s longest ever period without a rate change, at four months short of three years. However, the jury is out on whether the next move will be up, or down.
Those who think the cash rate will stay as it is, or even drop, say our economy is softening because of lower economic growth and the impact of the drought on farming. On the flip side, however, the recent drop in the unemployment rate and a pick-up in wages are likely to push up inflation and put pressure on the Reserve Bank to bump up interest rates.
If this happens, it will almost certainly mean we’ll end up paying more on our mortgage repayments. So, it’s important to make sure we’ve got our finger on the pulse when it comes to interest rates, including doing regular mortgage reviews.
The Reserve Bank governor, Philip Lowe, said at the rate announcement in April ‘19 that “if Australians are finding jobs and their wages are rising more quickly, it is reasonable to expect that inflation will rise, and that it will be appropriate to lift the cash rate at some point.” Basically, this means we’re looking at higher mortgage interest rates sometime in the near to medium future.
Interest rates are creeping higher
What we find interesting here at LiveWell is that, even though the official cash rate has stayed put for the past couple of years, the banks have still been edging their interest rates higher. When put on the spot, they claim it’s because their cost of borrowing money has increased – most of which comes from offshore and is more expensive than locally sourced funds.
This is a parallel situation to what tradies would experience if they’re sourcing materials from overseas and they become more expensive because of a shortage of supply, or the Aussie dollar exchange rate weakens. Your costs go up, so you pass that on to your customers.
But, no matter whether you think this is a genuine reason to increase interest rates or not, the bottom line is we have to swallow it, or start getting smart about what we pay to lenders in interest.
We’ve all seen the illustrations of how paying off just a little bit extra into your mortgage over time can mean thousands of dollars of savings over the life of a long-term loan. The reverse is also true – just think about the effect of paying 0.25 per cent extra interest over 20 years will mean to your pocket, for example. On a $300,000 loan that works out at an extra $10k you’re paying the bank.
So, it’s important to make sure you neutralise the ripple effect that interest rates have on your mortgage repayments. One way to do this is to check your mortgage interest rates regularly to make sure you’re on the best possible deal. We have a few insider tips to help steer you in the right direction.
Tips for owner-occupiers and investors
If you’re an owner-occupier, there are some strategies that can help you reduce your mortgage interest rate without having to switch banks. The first step is to research what competitor banks and lenders are offering. You can either go to each institution’s website and check out the variable and fixed rates they’re offering, or you can go to a comparison website like Canstar or UNO Home Loans and see what rates are on offer.
Once you’ve seen what’s available in the market, get in touch with your lender and have a good talk with them about reducing your rate. Most lenders these days will negotiate to keep good clients, but if they’re not willing to come to the party, be prepared to move to a lender that is.
Bear in mind, however, that if you’re on a fixed term mortgage you could be liable for fees if you decide to break your mortgage term early.
Investment loans are a slightly different kettle of fish, particularly if cross-securitisation has been used to finance a property portfolio. Cross-securitisation is a common technique used by new property investors, where collateral is used from one or more loans to secure another loan. Although it’s accepted practice, it is riskier and can lead to higher costs and cause you to lose out if better deals come on to the market.
It gets even trickier if your loan-to-asset ratio is over 80 per cent, as lenders are likely to play hardball because it’s harder to move due to mortgage insurance. And because the banks are only allowed to lend a small percentage of total borrowing to investors – around 10 per cent – this makes them even less willing to negotiate.
However, things are starting to open up on this front, so it may pay to have a conversation with an expert in this field who is able to negotiate on your behalf. Have a chat with us – we’re confident we can help!
5 good reasons to refinance your mortgage
There are five main reasons to consider refinancing your mortgage:
- Ensure loan serviceability by keeping repayments below 30 per cent of your gross income.
- Maintain a cash reserve of two to three months’ income to cover unexpected developments.
- Make sure you can save 10% of your income.
- You’re an owner-occupier and your interest rate is 4 per cent or higher.
- You’re an investor and your interest rate is 4.5 per cent or higher.
If you’ve been having a look at your home or property investment financing and feel like you could be doing better, LiveWell can definitely help. We specialise in helping hardworking Australians just like you get smart about their finances so you can be financially secure.
Our free service (we’re upfront that we take a referral fee from the professional partners we engage together to help you) provides you with great tools to cut through the numbers and get to the heart of your money situation. We help lift the hood on your financial position so you can see how things are tracking, including how you’re sitting with your mortgage interest rates.
We listen carefully, determine your needs and make sure you have the best specialists on board to secure your financial future. We also help reduce your risks by, for example, helping you untangle any cross-securitisation and making sure your loan repayments are no more than 30 per cent of your gross income. Saving on interest repayments is a key strategy in doing this.
Get started by taking our free financial health check and following our checklist of 10 core requirements for financial peace of mind.
Also, get in touch to set up a time to talk with us about pre-financial year-end planning to minimise your tax obligations.