When interest rates started to go up most of my clients were not concerned. Now?
I’m not so sure. But within months panic may start to set in
Many are protected because they are still on fixed interest loans which means even through the Reserve Bank increases rates mortgage payments go up by nil. Zilch. Nothing.
And that is the reason the Reserve Bank keeps pumping up rates. They hope it will influence those paying variable rates knowing that eventually those on fixed rates will get caught as the fixed rates period ends. And for many they end this year.
And many who are on ridiculously low rates this is going to be a major shock. It’s a Heart Attack shock moment to be honest – you will see what I mean if you read further.
During the pandemic the Reserve Bank lent about $2bn to the banks at almost 0%. This means the bank were flush with cash so lent it to us at low rates still allowing them to make a fortune. This resulted in us having big smiles as we bought cars, electronics, shoes, watches, homes and much more.
The figures are quite scary.
Some borrowers will be looking at their home loan interest rate rising from about 2% to between 5% and 6%. On paper this does not sound so bad but in reality, such a rate hit is going to cause people to cry. A lot of crying in fact. And a lot of emptying of alcohol bottles.
In the next year approx. $400Bn (yes you are reading correctly) will move from fixed rates to variable rates.
Let’s put some numbers to the equation. A $590,000 mortgage (not unusual) at 2% is $983 per month.
At 6%? Well it goes up to $2,950 per month in interest alone.
Now I don’t know about you but I think households will find it hard to find an extra $2,000 a month in their piggy bank overnight.
And remember the banks borrowed this money at almost 0% and charging you 6% so they are making a packet. Well, a bit more than a packet. More like billions of packets.
So, my advice is to start planning. And start preparing. And then hope for the best.
Where is what is likely to happen:
- Your bank will roll your loan into a standard variable rate. This will cost you more and you will not get the most competitive rate in the market.
- If you try to refix it there are no special deals around so you will pay more – probably more than the standard variable rate.
Your Plan? Refinance. Don’t Bet on It!
Interest rates have increased for 9 straight months. Property values may have fallen too depending on location.
This usually means borrowing capacity may have fallen and banks may refuse to give you as much as you would like to borrow. And remember refinancing is expensive! Very expensive.
I recently refinanced a $192,000 loan in my SMSF. The cost of financing? $8,000. That is 4% of the value of the loan. But it still made sense because the difference in interest rates was over 3%.
Sometimes it may be better to stay with the devil you know. Sometimes it makes sense to speak to a professional broker to move your mortgage.
Speaking to your existing lender and asking for a rate reduction is easier than refinancing (and cheaper). But sometimes talking to a broker makes sense because they often get better rates or incentives. We would advise you to do both.
At WOW! Advisors & Medisuccess we have brokers that may help you get a better deal. If you would like to further get in touch with us on 07 3161 9548 or firstname.lastname@example.org