Gone are the days when a home loan was a set-and-forget product. Caylum Merrick, Momentum’s Property Strategy and Finance Manager, looks at how a habit of reviewing your home loan can deliver valuable financial rewards.
Rising interest rates are putting a strain on household budgets, however, the real wealth destroyer can be complacency. The chart depicted below shows that Australians have some of the highest personal debt in the world, and it’s evident that home loans account for the bulk of personal debt.
Household debt as a percentage of net disposable income
Source: OECD 2021
While rates have risen rapidly, incomes have not kept pace. And that’s seeing higher interest rates put big demands on homeowners’ finances. Canstar found the monthly repayments on a $500,000 home loan have jumped by $1,084 since April 2022. On a $750,000 mortgage, monthly repayments are up by $1,626.
The solution to managing higher rates is getting into the habit of reviewing your home loan.
The danger of a wait-and-see approach
- Higher rates erode your borrowing power: As rates rise, your borrowing capacity falls (unless you’ve had a major uptick in income). Additional rate hikes will further restrict your borrowing power. Worst case scenario, you could be stuck with your old loan even if you want to refinance – a situation dubbed as the “mortgage prison”.
- Lenders are tightening their criteria for the best rates: The mortgage market is moving quickly. RateCity reports that several of the major banks now require at least 40% deposit to qualify for their lowest rates, up from 30% previously.
- The cheapest rates are still going to new customers: Staying loyal to your lender, or sticking with your old loan because refinancing seems “all too hard”, is costing you money. If you walk into the bank as a new customer, you could potentially slash 0.5% off your loan rate. It’s like dialling back several Reserve Bank rate hikes. Or, if we flip the picture, staying with your old loan can mean paying a loyalty tax of 0.5%. You won’t benefit from paying this “tax”. But your lender certainly will.
When should I review my home loan?
We recommend reviewing your home loan at least annually. This doesn’t mean you need to refinance each year. However, an annual approach gives you confidence your mortgage is still meeting your needs, and lets you know if you’re paying a competitive rate relative to the broader market.
Several other indicators can highlight that it’s time to shine a spotlight on your home loan:
- You’ve had major life changes: Marriage, the arrival of children, separation or divorce, or a major career change can all impact your personal cash flow. This makes it important to review your home loan following a significant life event, or better still, prior to the anticipated changes.
- You’re coming off a fixed rate: Reserve Bank figures show around 880,000 fixed rate home loans will mature in 2023. And, as our central bank points out, “these borrowers will face very significant increases in loan repayments”. We recommend getting in touch for a home loan review at least three months before your fixed rate matures. This gives you time to consider your options, and have a new loan lined up if you choose to refinance.
- Your interest-only period is coming to a close: Most lenders will only allow interest-only payments for a set period. You can apply for an extension, but there is no guarantee you’ll get the green light, and a full credit assessment will be required. For property investors in particular, the end of an interest-only period can have a substantial impact on cash flow, so it’s definitely worth exploring all options. Refinancing a loan often brings the dual benefits of a lower rate plus a fresh interest-only term.
- You’re planning to purchase another property: Whether you’re upgrading to your next home or investing in a rental property, plans to put home equity to work should trigger a home loan review. This isn’t just about securing the best possible rate. Different lenders use different valuation techniques, and switching to a new lender could result in a better valuation for your home, giving you a better opportunity to leverage home equity.
- You’re struggling to meet higher repayments: Few things are more stressful than struggling to keep up with mortgage repayments. But as we saw earlier, refinancing could potentially cut your loan rate by 0.5% and put cash back in your pocket each month. Rather than allow your loan to become a source of stress, take a look to see if it can become a source of savings with a home loan review.
Now is a great time to be proactive and get your loan reviewed. Reach out to your mortgage broker today to receive advice on the most affordable loan for your needs, assistance in handling your loan application and to liaise with lenders on your behalf.