The rising rate environment is leaving some heavily mortgaged borrowers – particularly those with more than an average $300,000 loan – scrambling to find ways to fund the significant increases in monthly repayments that have occurred since October last year.

With the announcement of a sixth rate rise by the Reserve Bank, these borrowers will be forced to look outside the square for ways to fund the increase in their mortgage repayments and will have to assess all aspects of their lifestyle and spending habits.

When lending rates decreased dramatically in the wake of the GFC, instead of using the opportunity to pay more off their mortgage, some of the highly leveraged borrowers became a little too complacent and slipped into old spending habits – and it is largely this group who are now feeling the pinch.

Although talk about rates often focuses on the average loan of $300,000, there are a surprising number of borrowers in major capital cities with mortgages commonly between $400,000-$600,000, who framed their credit and loan arrangements around interest rate levels twelve months ago and are now having to service around $330-$500 more in monthly mortgage repayments since October.

Indeed, some of those borrowers may have been hit with more than that rise in repayments as some lenders increased their rates beyond the official rate rise. So, when you do have a look at the overall financial impact on any borrower, it’s clear to see that some will be really feeling the pressure to find that extra money – with the added prospect of more rises to come.

CHANGES TO MONTHLY MORTGAGE REPAYMENTS ON DIFFERENT LOAN SIZES (FROM SEPTEMBER 2009- APRIL 30, 2010)

	Interest Rate	$300,000	$400,000	$500,000	$600,000
April 2010	7.13%	$2,145.28	$2,860.38	$3,575.47	$4,290,56
September 2009	5.78%	$1,892.76	$2,523.68	$3,154.60	$3,785.52
Repayment difference		$   252.52	$   336.70	$   420.87	$   505.04
With another .25% rate increase		$   300.85	$   401.13	$   501.42	$   601.70

Notes:

1. Repayments are based on a loan term of 25 years
2. The interest rate outlined is the average SVR of the big four banks

The key issue is that borrower behaviour over the last twelve months has seen two distinct patterns emerge among mortgage holders. The first group is those who have been financially disciplined to seize the opportunity to start paying more off their mortgage, and the second is those who have used the reprieve in rates to relax and re-claim old lifestyle habits – and it is this group that is now most at risk.

However, regardless of where a borrower now finds themselves, it’s clear that now is the time to make the necessary changes to get back on track by applying the necessary financial discipline to plan ahead for a rising rate cycle that may be in place for several years.

There are numerous options which can save households money and improve their overall cash flow, including:

• Eliminating multiple credit cards and reducing existing card limits.  Borrowers should then aim to  pay off or reduce any form of high interest credit.
• Revising plans to renovate your existing house or rescheduling those plans for later when rates are lower.
• Considering whether you can alter the structure of your mortgage to save interest by making fortnightly payments instead of monthly, thereby making more payments over the year.
• Keeping a record of all your spending and expenses for a month and looking at where you can make obvious cut-backs.
• Being smarter about when and where you purchase your food and petrol in order to save money.
• Keeping discretionary spending to a minimum to get back on track and then, only paying cash for items as you can afford them.
• Looking at utility bills and working out how you can reduce your phone, gas and electricity usage.
• Deciding whether you can affect your household earnings by changing the way you are paid so that it improves cash flow and allows you manage your household income more simply.

Tags: affordability, Comparison rate, Equity, First Home Buyers, Home Loan, Home Loans, rate rise, Refinance, Variable loan, variable rate

This entry was posted on Tuesday, May 4th, 2010 at 3:50 pm and is filed under Buying to Invest, First Time Buyers, Interest Rates, Refinancing. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.