The RBA’s decision to leave the cash rate on hold at 2 per cent for the 10th month in a row is unsurprising, to say the least, but little comfort for mortgage holders struggling to get ahead on their home loan repayments.
In addition to this, RateCity.com.au research shows that banks are now offering lenders with big deposits discounted rates of up to 1 percentage point.
The decision by banks to reward more stable borrowers comes on the back of global consensus of the need to ward off another financial crisis. Back home, this consensus has translated into stricter lending requirements, with banks favouring owner occupiers over investors, as well as larger deposits.
Your ability to meet your mortgage repayments each month is another key lending criteria employed by the banks to make sure you can repay your loan. But with rates at record lows against a backdrop of rising house prices, there’s mounting evidence to suggest low interest rates could be tempting people to take on more debt than they can afford.
There are plenty of institutions who will lend to ‘risky’ borrowers but it usually comes at a cost, normally in the form of higher interest rates. So when deciding on a home and a home loan, it’s always a good idea to work out what you can afford, both now, and five or 10 years into the future when interest rates are likely to be higher.
A buffer of 2 per cent is often seen as a prudent safeguard, however in today’s historically low rate climate, it’s not a bad idea to factor in a couple of percentage points more.
- What to consider when choosing a home loan
- How much is your property worth?
- Mortgage repayments: how much can you afford?
If history is anything to go by, the average cash rate over the last 20 years has sat around the 7 per cent mark, so the chances of it hiking up to this level in the course of a 30 year home loan is extremely high.
One of the best ways to prepare for an increase in rates is to switch to one of the lowest interest rates on the market and put the savings you make towards additional repayments on your loan. Not only will this help pay down your loan faster, it will also reduce the amount of interest you pay your bank over the life of your loan by tens of thousands of dollars.
For example, by switching from a rate of 4.5 per cent to one of the cheapest rates on the market at 4 per cent on a $500,000 home loan will save you $146 a month. If you invest this back into your loan, you’ll end up slashing over three years off your mortgage and saving more than $43,000 in interest.
You can easily do the calculations yourself and find out how much you can save just by switching to a more competitive rate.