posted in: Interest Rates
Interest rates have tripled – does that mean my loan repayments will also triple?
Interest rates have more than doubled over the last 18 months – does that mean home loan repayments will triple when fixed rates expire?
With ten back-to-back cash rate rises pushing interest rates up, it’s easy to panic about what impact that might have on your home loan repayments. With interest rates on principal and interest (P&I) loans now roughly triple what they were a year ago, combined with the rising cost of living, it’s understandable that borrowers are concerned.
The good news is that just because interest rates have tripled doesn’t necessarily mean your regular loan repayments will also triple. This is a common misconception. While the interest component will directly reflect any interest rate rises, remember a part of what you repay on a repayment loan each month is the principal. Once you factor in both principal and interest, the impact on your repayments isn’t as significant.
It is important to include information about how the present interest rates align with the long-term averages. Additionally, it is essential to acknowledge that there are options to decrease your monthly payments if required.
To understand how it all works, let’s first look back at the interest rate environment over the past several years.
Interest rates aren’t actually that high – when you consider interest rate history
While obviously a three-fold increase in interest rates will be felt by most borrowers, the reality is that interest rates aren’t actually that high if we take a historical view. We’ve had historically low interest rates in recent years and it was inevitable that they would eventually go up. We’re currently approaching a similar interest rate environment that we had around 10 years ago. What that means is that current interest rates are in line with a traditional interest rate environment.
The biggest challenge for many borrowers coming off record low fixed rates, is the RBA has increased interest rates at warp speed – providing a bumpy landing for those borrowers transitioning from fixed rates. While economists are predicting that the cash rate may rise again in the coming months, it is also tipped to begin falling by the end of this year or early next year. So, that means we should see some stabilisation soon.
How much do rate rises actually adjust your monthly repayments?
The good news it appears that we are nearing the peak of interest rates in the short-term. However, with a steep fall unlikely, it’s time we adjusted to the new normal. So, how are the current interest rates likely to be affecting your repayments?
Let’s say you had a $1 million home loan with a 30-year loan term and interest rate of 2.86% a year ago (this was the average lender rate at the time). Your principal and interest repayments would have been around $4,141 a month. Now, a year on, the average interest rate is around 6.61%. That would mean your repayments would now be around $6,394 a month. While that’s a sizable increase – and one that is surely very much felt by the home loan holder – it’s no nowhere near triple. Instead, it’s a 54.4% increase.
|Mortgage Size||Fixed rate repayment (2.26%)||New variable rate repayment (5.24%)*|
*70% LVR, package rate with a major lender
What can you do to lower your repayments?
If you’re finding that the increase in interest rates is still putting undue pressure on your cash flow, there are ways you can reduce your repayments.
Extend your loan period
One way to reduce what you pay each month is to extend out the loan term. This will reduce the monthly amount as it will be paid over a longer period but you will pay more interest over time because it will take longer to pay off your loan. Chat to your lender about whether they will do this for you, and if not, you may want to refinance to take advantage of a longer loan term.
Refinancing is a great way to reduce your repayments. Not only will you typically be able to select a longer loan term with a new lender, you will also typically secure a lower interest rate. With stiff competition for borrowers, many lenders are offering quite competitive deals for new customers. On top of lower interest rates, you may also be able to access cash back incentives to the tune of several thousand dollars.
What can I afford – is it time to remodel your new cash flow situation?
It might be time to reach out to your financial advisor to see how increased interest rates impact your financial strategy. In addition to adopting strategies to reduce your monthly loan repayments, you may also be able to reduce spending in other areas. It comes down to your financial commitments and goals. Updating your budget and remapping your financial strategy, could give you the confidence that these current interest rate rises can be comfortably managed – and life will go on!
For an assessment of your current situation, feel free to reach out to the Montara Wealth team who can talk through the best way to manage interest rate increases.