How to ease repayment pain now rates could be higher for longer

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A rate cut before the end of next year could only be justified if inflation fell sharply or there was a deep recession, according to former RBA governor Ian Macfarlane recently. By the way, he expects neither.

Meanwhile, last week new governor Michele Bullock warned the risk of a rise is increasing thanks to the Gaza conflict and soaring petrol prices.

There are still ways to combat the renewed prospect of sky-high interest rates if you make the right moves.Credit: Matt Davidson

So let’s move swiftly from a macro, big-picture discussion to a micro mortgage one … and how to combat the renewed prospect of higher-for-longer interest rates. Because already, on average, the International Monetary Fund says Aussies devote a greater chunk of their income to their home loan than households in any other advanced economy.

But there are ways to fight back, the most powerful of them almost undoubtedly refinancing.

This has been the only game in town in the 1.5 years since the surprise hike cycle commenced. However, it’s concerning that the number and value of refinances fell for the latest month, for which there are figures available.

Though this could have been caused by complacency on (now largely dashed) hopes that interest rates may soon begin to fall, it’s more likely a mortgage-market factor was at play: cashbacks of up to $4000 almost entirely disappeared.

This was because the cut-throat battle for your debt dollar has abated as households become more stretched and lenders look to shore up their loan books.

But – repeat after me – a cashback puts you ahead for only a short slice of a mortgage’s life, if that mortgage is more expensive than the best in the market.

It’s a short-term sweetener designed to blind you to the real best deal.

So, of far greater concern to me, and by rights you, is that the sharp refinance pricing is similarly down. The big four banks have been unwinding their aggressive market-stealing positions since March, although NAB has removed rate tiers for borrowers with different deposit amounts, improving the deals for those with less equity.

I’ve said it before and I’ll no doubt say it again: right now, confessions get concessions.

Of course, big banks by no means offered the best deals even when they were competing hard.

Today’s best-of-breed benchmark (for a quality, comparable loan with – importantly – a real offset account) is 5.69 per cent from Tic:Toc. Versus the RBA-tracked discounted variable rate of 7.06 per cent, that could slash $505 from the average $593,475 mortgage.

Don’t forget the really positive new development either: the loan approval process has been relaxed, with borrowers no longer having to prove they can cope with a further 300 basis points of rate rises.

Ludicrously, that borrowers couldn’t pass the serviceability test for a new, cheaper loan often trapped them in their old, more expensive loans because.

So even if you have been rejected before, it’s time to ask: might I now qualify? (Do this before applying, as every rejection drives down your credit score.) Lenders’ qualification criteria are comparable.

Besides enough “fat in your finances” to cover repayments, you usually need 20 per cent-plus equity in your home, and a good credit score and repayment history.

You mostly also need a principal and interest loan. But there’s a thought – if you are told you are still unlikely to be able to approved by a different, cheaper lender, maybe your existing one will let you go interest-only for a time?

You may even be able to do this without invoking official financial hardship provisions – all lenders must offer them if you stick up your hand and say: “Hey, I’m in trouble here.”

I’ve said it before, and I’ll no doubt say it again: right now, confessions get concessions.

Nicole Pedersen-McKinnon is the author of How to Get Mortgage-Free Like Me. Follow Nicole on Facebook, Twitter or Instagram.

• Advice given in this article is general in nature and is not intended to influence readers’ decisions about investing or financial products. They should always seek their own professional advice that takes into account their own personal circumstances before making any financial decisions.

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