Australian Mortgage Rate Hikes: How to handle it in 2023

On the 8th of March, the Reserve Bank increased the cash rate again, this time by another 0.25%. Now the cash rate sits at 3.60%.

Reserve Bank Cash Rate

With the rapid increase in interest rates, Australian homeowners need help paying back their loans. Customers on lower 2% fixed rates at the start of the pandemic now face the potential of paying 5 to 6% in interest, a whopping three times their usual rate. We understand as our own staff team here at AA Finance Solutions was also hit with a surprise to our own mortgages.

Leonard’s Experience

“I was paying around $2k a month when my interest rate was at 2.99% but as the rates went up I ended up paying up to $3k a month at a rate of 6.79%. I managed to refinance into a full doc loan which gave me a great introductory rate at 5.14% paying $398 less than the previous variable loan package.” – Leonard Nagawidjaja

Is Refinancing Still Possible?

Refinancing is definitely the way to go when it comes to paying less interest over time when there is a lender willing to offer you a better rate. However, with interest rates rising so often, the assessment rate that are used to assess a client’s eligibility to borrow would have risen as well to create a buffer to protect lenders.

Provided the client has not had any changes in their finances, they should be able to refinance but as assessment rates continue to rise, clients will find it harder to refinance as their income will be assessed on newer and higher assessment rates, to ensure they will be able to afford the loan even if the interest rates were to climb. If the client’s financial circumstances have changed, such as a change in job, salary or even a break in income. They may be stuck having to service their current loan.

Another factor that will affect the chances of a refinance would be the valuation of your property. Before refinancing, a valuation of the property must be done to let the lender know that what you are borrowing to pay off is really worth its current value. If the value of your property has fallen, it can affect the value that you are refinancing your property for.

Last Resort Solutions

Here are some of the last-resort solutions that can be done, but it will only be a temporary fix to your ongoing mortgage problem.

The first is to extend the duration of your loan from 30 years to 40 years or so; some lenders are allowing borrowers to do this. Doing so will pay less per month, which can help you temporarily until you can refinance. However, the drawback is that you will pay much more interest throughout the extended period.

The second is to switch to an interest-only payment. In this scenario, you would only pay the interest on your loan every month. Why lose your house when you can use this as a temporary solution to keep your home? When you have a much better financial capacity, you can always refinance or switch back to paying interest and principal.

We hope you guys are doing well, and if you are looking for someone to look at your loan and provide alternative solutions, speak to us. Our consultations are at no charge.

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