Interest rates are rising: here’s how to save on your mortgage

After pandemic-induced setbacks, the Reserve Bank of Australia (RBA) has finally increased the cash rate, with more rises predicted for upcoming months.

But what does this all mean for interest rates? And how will your home loan repayments be impacted?

In this article, we discuss why interest rates rise, as well as how this might impact homeowners. We also provide tips on how to save on your home loan now that rates have risen.

• Related: Rates are rising – should you fix or split yours?
• Related: 7 hacks to save money on your home loan in 2022
• Related: Tips for securing a low interest rate in 2022

The cash rate has officially increased – what does this mean for interest rates?

If you’re a homeowner, you’ve probably noticed that interest rates have been at an all-time low in Australia for the last 18 months.

In November 2020, the Reserve Bank of Australia (RBA) dropped the cash rate to 0.1% – its lowest ever.

The cash rate is used by banks to work out how to set their interest rates. While it’s not the sole factor that determines lenders’ interest rates, it does help inform them. Since the cash rate has been low, so have interest rates.

However, the RBA has officially increased the cash rate as of May 2022 by 0.25 basis points, taking it to 0.35%.

This is because inflation has risen higher than expected and the Australian economy has largely recovered from the COVID-19 pandemic.

Interest rates were dropped to historic lows in 2020 to encourage Australians to spend money and stimulate the economy. The economy doesn’t need as much support anymore, which is why the RBA has upped the cash rate.

With the cash rate increased, some lenders have already passed on this increase in full, raising interest rates by 0.25%.

How rising interest rates can increase your home loan repayments

When interest rates rise, the impact on your home loan is simple – your repayments can increase.

You’ll likely notice the rise sooner if you’re on a variable interest rate home loan, but borrowers with fixed interest rate home loans could see their repayments increase once their fixed term ends.

You might also feel the effects of rising interest rates more if you’re one of the many home buyers who has taken on a large mortgage while interest rates have been low and property prices have been high.

Read more about what your repayments might look like if interest rates doubled.

Rising interest rates, large mortgages and the rising cost of living could create mortgage stress.

What is mortgage stress?

With interest rates due to rise, some homeowners may face mortgage stress. Definitions of mortgage stress vary, but it can occur when a household spends more than 30% of their pre-tax income on home loan repayments.

Research by Digital Finance Analytics in June 2021 suggested just over 40% of Australian households are experiencing mortgage stress. However, it’s possible this figure could increase now that interest rates are on the rise.

If you’ve taken out your loan in the last couple of years, you might feel mortgage stress more than a borrower who’s had their loan for longer.

This is because borrowers with an older loan have had more time to build up a buffer to protect themselves against interest rate rises. This buffer could be in the form of an offset account, a redraw facility, savings, or equity.

Learn more about preparing for an interest rate rise.

How you can save on your home loan repayments when rates rise

Want to keep your repayments down as interest rates rise? Here are some of our tips for saving on your mortgage repayments as lenders start to hike their rates:

1. Review your interest rate regularly

Have you checked your current interest rate lately?

Keeping track of how your interest rate compares to others out there can be a good way to make sure you’re not overpaying.

You might regularly check the news to watch out for any cash rate movements or compare interest rates online. It’s likely the cash rate will continue to rise, so if you want to fix your interest rate, you may be better to do it sooner rather than later.

2. Chat to your lender about lowering your rate

When you’re researching interest rates, you might find that your lender is offering new customers a lower interest rate than what you’re receiving.

If this is the case, don’t be afraid to talk to your lender about lowering your rate to match what new customers are getting. Chances are, if you have been a responsible borrower, they’ll be happy to oblige and keep your business.

3. Refinance with another lender for a better deal

If you don’t have luck negotiating with your lender on a lower rate, it can be a good idea to switch to a different lender with a more competitive rate. While most lenders are raising their interest rates after the cash rate increase, there are still lenders offering better deals than others.

Don’t forget to consider the home loan as a whole – not just the interest rate – when refinancing your home loan. You may regret opting for a home loan that doesn’t suit your needs just because it has a low rate.

4. Consider an offset account or redraw facility

Using an offset account or a redraw facility can be an effective way to save on your loan repayments when interest rates rise.

An offset account is a type of bank account attached to your home loan. The amount of money in your offset account is subtracted from your loan balance to calculate the amount of interest you’re charged.

For example, if you have a home loan balance of $480,000 but you have $25,000 in your offset account, interest will only be charged on $455,000, instead of $480,000.

A redraw facility could also help you save once rates rise. Redraw facilities pool extra repayments you’ve made on your home loan so you can withdraw these funds should you need them down the track.

5. Review your home loan for unnecessary costs

You may be able to save on your mortgage repayments if you review any home loan features you aren’t using, but you’re still paying for.

Maybe you have a credit card as part of a home loan package that you don’t use, but you still pay the fees. Or maybe you’re paying for an offset account, but the interest savings are outweighed by the account fees.

Whatever your situation, getting rid of home loan features that are costing you can be a good way to help you save on your home loan.

6. Cut back on unnecessary spending

While the cost of living has been steadily increasing, there are still ways you can save, especially when it comes to unnecessary expenses.

These might be streaming service subscriptions you don’t use, or you might be racking up a large takeaway food bill each week.

There’s certainly nothing wrong with spending your money on these things, but if you are struggling with your loan repayments, cutting back on these expenses and putting the money towards your mortgage could help.

Want a better deal on your home loan? Our friendly Home Loan Specialists are here to help. Book an appointment at a time that suits you.

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The information in this post is general in nature and should not be considered personal or financial advice. You should always seek professional advice or assistance before making any financial decisions.