Strategies to help mortgage holders handle rate rises

A mortgage-holder with a $1 million home loan on the average variable rate could insulate themselves against the equivalent of several Reserve Bank of Australia cash rate increases by switching to the cheapest variable rate on offer.

The lower rate would save a borrower nearly $10,000 in the first year, or $21,500 over two years, according to analysis by RateCity, which monitors savings and borrowing rates.over the next year, with RBA governor Philip Lowe saying the cash rate could rise from 0.35 per cent to 2.5 per cent. “Borrowers are clearly concerned about the future and how several rate rises will squeeze household budgets,” says Phoebe Blamey, director of Clover Financial Solutions, a mortgage broker.

Whether you’re an owner-occupier, investor or own a property via a self-managed super fund, here’s how you can lessen the impact of rate rises.A borrower with a $1 million mortgage could recoup the costs of switching from the new average variable rate of around 3.17 per cent to the cheapest variable rate on offer within a couple of months.

Some borrowers could be forced to review their borrowing because of changed financial circumstances, such as a job loss or having misrepresented their income, or savings, to the lender. Alex Jamieson, founder of AJ Financial Planning, says: “The best time traditionally to fix rates is in the middle of a recession when interest rates have been cut and the recovery phase is just about to start. That’s not now. Investors considering a fixed-term mortgage have missed the boat. Variable is the way to go.”

Analysts expect rents to rise rapidly in tight rental markets, particularly after the ending of rent caps and eviction controls in the pandemic. These are likely to offset the impact of higher mortgage repayments when rates begin to rise. Further, rates on interest-only loans are often more than 20 per cent higher than principal-and-interest mortgages.Trustees of self-managed super funds investing in property should undertake a full review to ensure there is sufficient liquidity to deal with any financial pressure from rising rates and costs.

Demand for residential and commercial investment properties jumped during last year’s property boom by around 22 per cent to almost $66 billion, according to analysis by the Australian Taxation Office.

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