Borrowers across Australia with variable rate home loans have just been hit by an unwelcome surprise. ANZ will increase interest rates on its variable owner-occupied and investment home loans by 0.16%. While Commonwealth Bank is set to lift rates on all of its variable rate home loan products by 0.15%. This will impact both new and existing customers.
Only recently, Westpac, Suncorp Bank and Adelaide Bank announced they will increase their home loan interest rates, citing funding pressures and now two major banks will follow. In summary, out of cycle rate rises included the following lenders:
- Westpac – 0.14% (variable rate loans)
- Suncorp – 0.17% (variable rate loans)
- Adelaide Bank – 0.12% to 0.40% (owner-occupied and investment loans)
- ANZ – 0.16% (variable owner-occupied and investment loans)
- CBA – 0.15% (variable rate loans)
Westpac was the first of the major banks to make the move, but others have quickly jumped on the bandwagon. Suncorp and Adelaide Bank followed Westpac’s example almost immediately. More recently, Commonwealth Bank and ANZ announced their mortgage rate hikes, which are expected to bring in a combined $1 billion in interest for these lenders.
Are Smaller Banks Raising Rates?
Westpac was not the first lender to raise rates. Back in June, some of the smaller banks were quietly starting to raise their variable mortgage rates. AMP Bank, Auswide Bank, Bank of Queensland and others were the ones to set off this domino effect. Experts have been eyeing the major banks ever since, expecting a possible out-of-cycle variable rate hike announcement. And, at the end of August, it happened.
What Does This Mean for Your Mortgage?
If you have a variable mortgage right now and your lender raised rates, your repayment amounts are going to go up. How much they increase depends on the size of the interest rate hike and the size of your loan. For example, with Westpac’s 0.14% increase:
- With a $300,000 loan, you would pay $35 more a month
- With a $500,000 loan, you would pay $58 every month
- With a $700,000 loan, your monthly repayment amount would increase by $82
Even if your bank hasn’t raised their variable home loan rates yet, you may still see an increase in the future. Generally, once the larger banks announce rate hikes, most other lenders do the same.
Sally Tindall, the research director from RateCity, predicts more increases going forward, saying, “The message for Australian mortgage holders is now clear: be prepared to shell out extra for your home loan or consider refinancing.”
What Are Your Options in a Raising Rate Environment?
If you are unhappy with your loan, you do still have options. Even with some banks raising rates, there are still plenty of lenders available with competitive interest rates. If you can refinance to a new home loan with a lower rate, you may be able to save a lot of money.
For example, with a $500,000 loan and 25 years remaining on the mortgage, switching from a 4.2% rate to a 3.8% interest rate – which is less than half a percentage point reduction – you could save $110 a month and $33,129 over the course of your loan.
You’d still have to pay refinancing costs, and ideally, your loan-to-value ratio (LVR) is low enough so you can avoid paying Lenders Mortgage Insurance (LMI) when you refinance, but, it doesn’t take a huge reduction to help you save money by switching loans.
With the possibility of more interest rate hikes in the future, it also may be worthwhile to consider refinancing to a fixed rate loan. A lot of Aussie homeowners are using this strategy – over the next 12 months 38% of Australian mortgage holders are choosing to fix their home loan. Source: finder.com.au
With predictions of a cash rate rise by the RBA somewhere in 2019 or 2020, the reality is that this recent rate hike won’t be the only one. By refinancing to a fixed rate mortgage, you can lock in your current low rate. Then, even when variable mortgage rates go up with your lender, your interest rate – and your mortgage repayments – will stay the same.
Refinancing to a fixed loan won’t just offer potential savings. It also offers peace of mind. You’re not going to be lying awake at night worrying about your mortgage with a fixed rate loan.
A rising rate environment can be intimidating, especially if you have a variable rate home loan. Look around, compare what other lenders are offering, and find out how much you can benefit from refinancing.
With an expert panel of over 25 lenders, and over 50 eChoice mortgage brokers across Australia and plenty of competitive home loan deals out there for home buyers and refinancers, please do not hesitate to call or email back should you have any questions.
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