The Reserve Bank of Australia’s decision to lift the cash rate this week has been unsurprisingly controversial.
Rising interest rates are putting many homeowners in a precarious position. If you have a mortgage, chances are you’re going to feel the pinch, and you might also worry about how you’ll meet your repayments if rates continue rising.
Fixing all or part of your loan at a set rate is one option for potentially mitigating the unpredictability of rising rates. However, what’s appropriate will vary widely from one household to the next based on circumstances. That is to say, there’s no one-size-fits-all approach to navigating mortgage repayments, and you should always seek professional advice relevant to your situation.
Below, experts weigh in on what consumers should consider in relation to fixed rates, mortgage repayments and mortgage-related financial stress.
‘We’ve been able to reverse a rate increase … by moving banks’
Nick Ash, a mortgage broker at Entourage, says fixed rates can bring peace of mind.
A fixed rate locks in the rate of interest for a period of time – usually between one and five years – as opposed to a variable rate, which fluctuates over the life of the mortgage, including when the RBA changes the cash rate. Consumers can choose to have a fully fixed mortgage, a fully variable mortgage, or a mix of both.
Ash says the decision is up to the consumer, but that the predictability of fixed rates can help with budgeting, giving homeowners “certainty of repayments – you know exactly how much is going to go out”. They may also save on interest.
Variable rates are volatile, leaving consumers exposed to unexpected payment increases. On the other hand, variable interest rates can also decrease, so over the life of a mortgage, periods of lower interest may break even with periods where interest is higher.
The variable component of a mortgage can also have an offset account attached to it, which means whatever you have in savings “offsets” your interest, reducing the proportion of the loan that you pay interest on. Banks generally don’t offer offset accounts for fixed products.
When you fix your interest rate, it may be fairly close to variable rates on offer, though it could be slightly higher or lower based on whether the market expects rates to rise or drop in the near future. The benefit of a fixed rate is that if interest rates go up, the fixed rate you have agreed to with your lender does not, so your monthly repayments stay the same.
The downside is that if interest rates fall beneath the fixed rate, you’re stuck paying the fixed rate until your fixed term runs out. You can sometimes pay to break a fixed term loan, but it’s generally costly and may not be worth it.
Ash warns that over the last seven months, there has been a slow increase in the fixed rates offered by the major banks, which happens outside the RBA cycle. So until you sign on to a fixed rate loan (which can’t change for the term you’ve signed up for), the fixed rates available in the market are constantly changing. “Fixed rates can move at any point, and we generally get no notice,” he says. “You’ll be talking about a rate one day and then they change overnight.” This can make getting a good deal on fixed rates difficult.
Ash’s view is that this upward trajectory for rates could be a long one. He suggests those with a mortgage should take action now to make sure they’ve got the best possible deal. For those on variable rates, often the gains outweigh the costs when switching banks, regardless of whether rates are fixed or variable. “We’ve been able to reverse a rate increase or two just by moving banks,” he says. “It’s kind of like insurance, and often a bank will offer a better deal to a new customer.”
Diana Mousina, deputy chief economist at AMP, says Australia’s problem with inflation was already occurring before the war in Iran, but that the longer the war drags on, the higher the risk of inflation becomes. Because this is impossible to predict, consumers are really hedging their bets if they apply a fixed rate to all or part of their mortgage.
She also says rising rates aren’t a bad news day for everyone. People with mortgages “are going to be hit hardest” – but for those looking to buy, “interest rate rises may actually help to soften the housing market”.
‘Refinancing is for people who can pass that credit test’
For many, fixed rates won’t solve mortgage stress caused by rate rises. Vicki Staff, coordinator of the national debt helpline, says for a lot of people, switching loan providers or refinancing is not even an option.
“Refinancing is for people who can pass that credit test. You still have to be assessed for affordability for restructuring. And we’re talking about people who don’t have that affordability. They don’t have … any more capacity left,” she says.
Staff says people are reaching out to the national debt helpline with multiple debts, often underpinned by housing stress, and that mortgages are their number one concern. In February, the helpline received 15,857 calls from consumers, up 9% from the previous year. The helpline is also receiving calls from a new demographic: those who are employed but struggling to afford both their mortgage and essentials.
‘This isn’t just about individual choices’
Nadia Harrison, CEO of Mortgage Stress Victoria, says households can only do so much when faced with ongoing rate rises.
“Where possible, it’s worth reviewing your loan and understanding your options. But it’s also important to recognise that many borrowers are already doing everything they can. Ultimately, this isn’t just about individual choices, it is a reflection of how our mortgage system is designed,” she says.
Harrison says if you’re struggling to make your mortgage repayments, reach out early.
“Lenders do have hardship programs, but what support looks like can vary depending on the lender, which can lead to very different outcomes for people in similar situations.”
“There are also organisations that can help free of charge, including Mortgage Stress Victoria and the national debt helpline which both provide guidance and support to people navigating these challenges.”
Staff agrees, and says you have a right to ask your lender for a hardship arrangement.
“I’d also encourage mortgage and other credit providers to remember that people are doing it tough, and that they need to work closely with their customers, to support them through a difficult time.”
In Australia, the national debt helpline is available on 1800 007 007. In the UK, Citizens Advice offers a debt helpline on 0800 240 4420
