Prepping for a rate rise: Borrowers facing mortgage repayment pain

• Mozo’s analysis reveals if lenders increased home loan rates by 40 basis points, borrowers paying principal and interest on an average $500,000 loan over 25 years, could see their repayments increase $107 per month going from $2,431 to $2,538. 
• Mozo’s research found almost a third (29%) of borrowers have been putting extra money into their savings accounts to get ready for higher interest rates 
• One-in-four (24%) have been stashing cash in offset accounts to help reduce mortgage repayments 
• 11% of borrowers have been cutting back on discretionary spending in preparation for rate rises
• The leading variable rate in the Mozo database is 1.99% through online lender Reduce Home Loans, which is 124 basis points below the average, 3.23%.

With some market watchers forecasting a 40 basis point increase to the cash rate later today, if lenders were to pass the rate hike on in full, borrowers would be facing significant mortgage repayment pain. 

On an average $500,000 home loan over 25 years, Mozo’s analysis reveals a 40 basis point increase could see borrowers paying principal and interest slugged an additional $107 per month, with their repayments going from $2,431 to $2,538. 

It also found borrowers on $750,000 loans would be up for an additional $160, with repayments going from $3,647 to $3,807. On a $1,000,000 loan repayments would jump by $213 from $4,863 to $5,076.

The analysis comes as Mozo’s latest research reveals more than three-quarters (76%) of borrowers have been preparing for rate rises and higher mortgage repayments. 

“There’s no doubt that many home loan customers will be sweating on another rate rise today but the good news is many people have been preparing their finances by setting up offset accounts, building up their savings or cutting back on spending,” says Godfrey.

Mozo found around a third (29%) of borrowers have been setting aside extra money in saving accounts to help cover the future increase in their mortgage repayments. A further 24% of people have been putting spare change into an offset account to help reduce home loan repayments. While some (11%) have begun cutting back on spending to build up savings in preparation for higher interest rates.

“Even with home loan rates steadily increasing, it pays to compare and make sure you're getting the best deal possible. We found some lenders are offering variable rates up to 100 basis points lower than the average,” Godfrey says. 

The leading variable rate in the Mozo database is from online lender, Reduce Home Loans, at 1.99%, 124 basis points below the average, 3.23%. 

Mozo found a 25 basis point increase would see borrowers paying principal and interest on an average $500,000 loan over 25 years, paying an extra $67 per month with repayment going from $2,431 to $2,498. On a $750,000 loan, monthly repayments would increase $100 going from $3,647 to $3,747. On a $1,000,000 loan repayments would increase by $133, going from $4,863 to $4,996.

Tips for dealing with an interest rate increase: 

• Stress test your ability to make higher repayments: Use an online calculator to find how much your mortgage repayments will be as rates increase.
• Compare home loan rates and switch to a better deal: Try to negotiate a better deal with your existing lender or compare rates and switch. 
• Set up an offset account: Compare interest rates on home loans with linked offset accounts. Getting your salary paid into an offset account can help to reduce your interest payments. 
  

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Notes: Rates correct as at 6 June 2022. Mortgage repayment increases are calculated by adding a 0.40 basis point increase to the current average variable owner-occupier principal and interest rate in the Mozo database, 3.23%. Mozo commissioned a nationally representative survey of 1007 Australians conducted by Researcify between 14- 26 April - 2022. Where percentages equal more than 100%, respondents were asked to select all options that applied.