Homeowner advice to avoid falling off mortgage cliff after RBA doesn’t raise interest rates

Homeowners in Australia have been urged to consider refinancing or switching to another lender to avoid falling off a ‘mortgage rock’.

Hundreds of thousands of Australians breathed a sigh of relief on Tuesday when the Reserve Bank chose not to raise interest rates for the eleventh consecutive time.

The decision gives those headed for the “mortgage abyss” time to get their finances in order before weathering the previous 10 interest rate hikes in one fell swoop.

RBA data shows that the terms of about 880,000 borrowers, who benefited from record-low fixed-rate mortgages during the Covid pandemic, will mature by the end of 2023.

The imminent maturity means that their loans will transition to variable products and they will face all 10 previous interest rate hikes at once.

RateCity.com.au’s director of research, Sally Tindall, is urging those who know they will be affected to formulate a strategy to soften the blow.

“If you’re on a flat rate, don’t do anything, whatever you do,” she said.

“Banks typically push customers by their fallback rate, which is usually horribly uncompetitive.

‘Make a diary of the end date of your loan and start comparing your options in two months’ time.

“That could be haggling with your current bank or switching to a new lender that wants to offer you a better deal.”

Ms Tindall made more suggestions on how homeowners can avoid falling off the “mortgage rock”.

“Refinancing can help reduce the size of the cliff, but some people may find it an option they can’t pull out of their back pockets because they can’t pass the new bank’s stress test at much higher rates,” she said.

‘People in the mortgage prison should not just throw their hands in the air. Your options may be limited, but that doesn’t mean you should throw in the towel – there’s nothing stopping you from asking your own bank for a better deal.’

MD Resolve Finance director Don Crellin has similar advice.

“Many lenders will be happy to work with a broker to negotiate a more competitive starting rate or help them look for new lenders,” he said.

The difference between a set-up rate and a negotiated rate can be hundreds of dollars per month.

“It’s very clear that this will make a huge difference to most homeowners.”

MD Resolve conducted a survey of 1,000 mortgage holders that found that 48 percent of respondents would be in financial trouble if their mortgage payments increased by up to $1,000 — causing them to consider selling their home.

RateCity’s own models show that someone who borrowed $500,000 in July 2021 at a two-year fixed rate of 1.94 percent, currently paying $2,105 per month, would end up paying $3,469 per month if they did nothing by the time their fixed rate expired.

Hundreds of thousands of Australians breathed a sigh of relief on Tuesday when the Reserve Bank opted not to raise rates for the 11th consecutive time

The increase would cost an additional $1,365 per month.

However, if the same person negotiates with their existing bank and lowers their rate from 7.18 to 6 percent, they will only have to pay an additional $1,028 per month.

And by refinancing to a bank that offers 5.25 percent, they’ll only have to pay an additional $821 per month — well below MD Resolve’s threshold for mortgage stress.

The break in the spot rate, which will remain at 3.6 percent for April, is based on the release of positive data the RBA relies on.

The Australian Bureau of Statistics published optimistic job data, rising retail numbers and declining inflation ahead of the interest rate decision.

Bill Gremos, who runs online homewares supercentre HomeMakerCentral, said the retail numbers clearly showed that households were still struggling.

“The impact on households of rising energy costs, higher grocery bills, high rents and even mortgages, fuel currently costing more than $2.30 a gallon, is making life very difficult for many,” Gremos said.

“It is undoubtedly a challenging time for retailers at the moment, but those who focus on providing an excellent customer experience and exceptional value for money will be best placed to deliver good results in the current circumstances.”

The RBA Board will meet again on May 2 to make the next interest rate decision.