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How to beat mortgage stress

How to beat mortgage stress

By Michelle Hutchison
September 2, 2009

As housing prices have increased in recent months and media speculation grows of imminent interest rate rises, mortgage stress may soon be rising however there are simple steps to take now to keep you out of the red.

The Reserve Bank of Australia (RBA) has reported intentions of shifting interest rates back to “normal” conditions following signs of economic stability.

“Interest rates are expected to rise by 1 percent over the next year however this will be gradual rises,” says Damian Smith, RateCity CEO. “So home owners need to plan now to avoid falling into mortgage stress.”

According to the RBA, mortgage stress occurs when more than 30 percent of your income is used towards home loan repayments.

For the average home loan of about $270,000, this would mean Australians would need to earn more than $66,320 per year to cover monthly repayments of about $1,658 with the average 5.5 percent p.a. variable interest rate.

Housing affordability is already under pressure following research released by the Australian Bureau of Statistics (ABS) that national house prices have risen 4.2 percent in the June quarter.

“If interest rates rise by 1 percent, monthly repayments for the average home loan would increase by $165, which will place a lot of pressure on some Australians,” says Smith.

“The first home buyer market will feel the greatest pain when the First Home Owners Boost ends in December.”

According to Smith, taking the time to find the best home loan rate can dramatically impact your repayments.

“As interest rates start to rise more attractive home loan deals may appear as lenders will compete harder to secure your business.”

Here is an example of how one couple beat mortgage stress by shopping around to secure a better value home loan.

Dave and Sally are considering a home loan of $300,000. Their local bank’s standard variable home loan currently has a comparison rate of 6.05 percent p.a. for a 25-year term. Monthly home loan repayments for the coupe would be about $1,942.

If this rate increased by 2. percent to 8.05 percent p.a., monthly repayments for the same loan would be about $2,325, which is about $4,596 extra per year.

However, by comparing deals online at RateCity, Dave and Sally found the Homestar Standard Variable home loan, with a 5.03 percent p.a. interest rate.

Monthly repayments for this loan would be $108 less than their first choice at about $1,759. If this rate jumped 2 percent then Dave and Sally could still potentially save up to $1,416 per year or $35,400 over the life of their loan compared to the previous loan.

If Dave and Sally took up the Homestar deal and also added about $176 to their monthly repayments, which is the same as about 1 percent more of interest, the couple could potentially save a further $42,000 in interest and reduce their loan by four years and one month.

“To avoid mortgage stress, more people should be hunting for the best home loan deals as interest rates start to rise,” says Smith.

“After all, you are the one that benefits from the savings you could make.”

To compare today’s lowest mortgage rates visit the RateCity home loans page.

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