If your mortgage is your largest financial commitment, then it is increasingly important that you take the reins and be proactive in your financial management. Today’s economic climate is defined by global uncertainty, whilst we are experiencing a period of rising inflation that we are trying to keep under control. We are looking at a near certainty of subsequent interest rate rises, which will put further strain on already tight cost of living pressures.
We see so many mortgage holders just take out a loan and “sit and forget” and just pay the instalments as they fall due, but many borrowers don’t realise that they may be accepting outdated loan products with uncompetitive interest rates.
This could lose you tens of thousands of dollars over the life of your loan.
So how can you protect yourself from overpaying to the lenders? ‘
A regular review of your mortgage alongside an open mind to switch lenders is a savvy financial strategy for both homeowners and property investors. If you want to take control of your household budget, investment cashflow, and ensure you’re not overpaying, then a regular mortgage review is essential.
Why Interest Rates Are Rising in Australia
To understand why mortgage reviews are so critical right now, it is important to first understand why interest rates are rising.
The Reserve Bank of Australia (RBA) adjusts the official cash rate as its primary tool to manage inflation and stabilise the economy. The RBA aims to keep inflation within a target range of 2–3%. When inflation rises above this band, the central bank typically increases interest rates to slow economic activity and bring down inflation.
Since the start of the year, we have seen inflation rise to around 4.6%, which can be contributed to global energy price shocks, geopolitical tensions, and international supply chain disruptions. This has results in the RBA announcing multiple rate hikes this year, with more expected.
If we do not see inflation coming under control by reduced borrowing and spending curbed, then we may witness the cash rate climb to levels that we have not seen in over a decade, which may be frightening for many families who are living on tight household budgets.
The Impact on Mortgage Repayments
For the average Australian mortgage holder, rising interest rates translate directly into higher monthly repayments. When the RBA increases rates (usually by 0.25%), this will add around $100-$120 per month to the average Australian mortgage of $700,000.
Even a modest 0.25% rate increase can add around $120–$150 per month to repayments on a typical mortgage of approximately $730,000. Over multiple rate rises, this compounds quickly into thousands of dollars annually.
The largest concern is that with every rate increase, this brings more Australians under financial strain and at risk of ‘mortgage stress’ if interest rate hikes continue.
If you are a borrower that fixed your loan at a low rate, and now roll into a much higher rate as your loan becomes variable, you are at risk of ‘repayment shock’.
Even if you’re a property investor, you can still feel the stress as rate rises can erode your cash flow and profitability and turn your positively geared investments into negatively geared and erode your rental yields.
How a Review of Your Mortgage Can Help.
Particularly if you have held your mortgage over a long period, you may be under a lending structure that is outdated and no longer competitive.
In order to attract more customers, lenders are constantly issuing special offers and deals which are not automatically passed on to new customers. In a competitive environment, it is easier than ever to switch lenders if you are not locked in and receive a better deal as these are often only offered to new borrowers.
By having your mortgage reviewed you can see whether the rate you are under is competitive, whether your loan structure aligns with your financial goals, if you are able to be offered a better deal, and if you have all the best features on your facility (like offset accounts and redraw facilities enabled).
Even a simple phone call might secure you a better rate which can lead to substantial savings over the life of your loan.
If you want to shop around, getting advice from an experienced mortgage broker can open up possibilities that you weren’t even aware were available.
The process of reviewing lending options can be time-consuming as well as understanding all the fine print with terms and conditions. An experienced mortgage broker can assist you with all of this and break it all down for you.
Mortgage brokers have access to dozens of lenders including both major banks and non-bank lenders and are able to align your financial goals with the right product that each institution can offer. Because brokers develop direct relationships with lenders, they are able to negotiate strongly and know what a reasonable request is to secure a better deal for you.
How You Can Prepare for Further Rate Increases
With no clear end to the global economic tensions, it is clear that further rate rises are a strong possibility. These can’t be avoided, but preparation is key.
If you are prepared, and act early, you will be in a far better position to cushion yourself from any impact.
It is always advisable to have a financial buffer in place, usually in an offset account is the best place to store this. You should aim to have at least 3 to 6 months of repayments available. The offset account with reduce interest charged on your loan, which can really add up over the life of your loan.
A review of your loan structure can also help. Consider whether a fixed, variable, or split loan suits your needs and risk tolerance better. A good method to consider if your finances are structured correctly is to perform a “stress test” on your finances, whereby you calculate the impact of your repayments if interest rates were to increase up to 2%.
The best advice we can give anyone looking at their financing options is to act early. If you feel that repayments are becoming unmanageable, acting early, or investigating whether a refinance will assist is always easier when you do not wait. Taking a proactive approach and regularly assessing your finances can unlock savings and improve your financial resilience.
