Australian real estate: how to save $16,000 on your mortgage

Once interest rates go up, they will continue to rise very quickly and mortgage holders will take the biggest hit.

Mortgage holders have dreaded the day the Reserve Bank of Australia will raise interest rates, but they are underestimating how quickly they will rise – once the floodgates are opened, an expert has warned.

Last February, the RBA assured Australians it would take at least another six months before raising rates, saying they would need to see two more quarterly inflation reports.

But last week RBA Governor Philip Lowe admitted that inflationary concerns caused by the Ukraine-Russia crisis could force him to raise Australia’s interest rate much sooner than expected.

The Commonwealth Bank thinks this should happen in June this year.

And now Steve Mickenbecker, head of the financial services group at comparison site Canstar, believes the main problem will not be that interest rates have risen, but that once they have risen they will continue to rise. quickly.

“An increase of 0.15 or 0.25% does not add much [to a mortgage]Mr Mickenbecker told news.com.au on Monday.

“What people need to remember is when the Reserve Bank moves [the cash rate] from the bottom, history shows that there are usually six or eight increases in 18 months or two years.

“It dramatically increases your home loan repayment.”

But there’s a way homeowners can save up to $16,000 if they act now.

Interest rates in Australia reached a record high of 17.50% in January 1990. Since then they have averaged 3.93%.

The last time the RBA raised rates was in 2010. Since then, they have only been falling.

The official exchange rate is at a record high of 0.1% since November 2020 in response to the Covid-19 pandemic, but is expected to jump 1% by the end of this year to reach 1.25% l ‘next year.

Although a 1% increase seems like a tiny amount, it could add hundreds or even thousands of extra dollars each month to the average Australian mortgage.

Mr Mickenbecker estimates that in the last half of 2023, the cash rate will reach 1.75%, which means that the current average mortgage rate of 2.95% will rise to 4.72% accordingly. here there.

Canstar’s analysis shows that for a year and a bit, a borrower with a $1 million home loan is paying $4,189 per month, or $50,268 per year.

If the cash rate increased in line with the Commonwealth Bank’s forecast and the average variable rate increased accordingly, their repayments could reach as much as $4,822 over the next few years.

Over a 12-month period, a mortgage holder would pay $57,864, a difference of $7,600.

That could spell disaster for around a million Australian homeowners who have never experienced a rate hike before, having only recently entered the market in the turbocharged property year of 2022.

No need to worry though – Canstar’s analysis has found a way for Australians with mortgages to save up to $16,000.

Mr Mickenbecker advocates fixed home loans to spare homeowners the immediate pain once the interest rate starts to rise.

“Fixed rates were much lower than they are now, people think they missed the mark,” he explained.

“But it’s not too late. Take a little pain now and you’ll be ahead in the next 12 months.

For example, if a mortgage with a loan of $1,000,000 principal and interest was locked in at the three-year average fixed rate of 3.32%, their monthly repayments would be $4,391.

The total interest over the three-year period would be $96,679.

Meanwhile, if they paid the variable loan monthly payment of $4,822 in the third year of the cash rate hike, as mentioned above, that would bring their total interest paid to $113,020.

That’s $16,341 more than if they had chosen to secure their loan for three years.

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