Although the Reserve Bank of Australia has decided to keep interest rates on hold for July 2018, with the cash rate remaining at 1.5 per cent, a slew of smaller banks have chosen to raise their rates.
Macquarie Bank has announced variable rates will be lifted by 0.1 percentage points for their current owner-occupiers with interest-only payments, and those with principal and interest with see a raise of 0.6 percentage points.
Macquarie Bank joins AMP, Bank of Queensland, Suncorp, ME Bank, Pepper Group, IMB and Auswide in raising rates, and experts say it’s only a matter of time until the big four banks - NAB, Commonwealth Bank, Westpac and ANZ -do the same.
The big four control more than 80 per cent of Australia’s owner-occupier home loan market, and would plunge thousands of Australian families into mortgage stress should they decide to raise their rates. Fortunately, the decision to do so isn’t an easy one. If banks raise their rates, they risk thousands of owner occupiers into defaulting on their loan repayments, which isn’t good for anyone.
Thanks to years of lax lending by banks, rising property prices and stagnated incomes, homeowners now have dangerously large mortgages hanging over their heads with little to no wiggle room for rising costs.
Data scientist and banking sector analyst Martin North told The New Daily he estimates that 975,000 Australian households are already experiencing mortgage stress, and thousands more are at risk of not being able to cover their repayments and household costs should rates continue to rise, and if there’s mortgage stress, then there will be a flow-on effect to property prices, resulting in a reduction of home values.
What is mortgage stress?
Mortgage stress is when home-owners are spending 30% or more of their pre-tax income on home loan repayments, or when a household’s income does not cover its ongoing costs.
How can you avoid mortgage stress?
- Don’t put yourself in the position in the first place. When buying a home, work out a simple budget that includes normal living expenses as well as home loan repayments that are comfortable for you to afford right now. That way, if rates rise, you won’t feel the pinch quite so bad.
- Speak to your bank or lender about lower interest rates, reconfiguring repayment plans and interest-only options before you’re at risk of making payents late or missing them altogether.
- Cut out things that are not necessities like eating out or takeaways.
- If you're serious about saving money then quitting smoking will be that much easier. It's astonishing how much you'll save not to mention the health benefits.
- Save up and buy quality items. A mistake many people make when trying to save money is to buy 'cheap' items. You end up spending more money in the long run because these items rarely last.
- Pay more than the minimum repayment amount. If you get in the habit of doing this right away then you will pay off your loan much faster.
- Be in the habit of budgeting before you get a home loan. Know what you can afford and only borrow what's reasonable and what you know you can pay back. Know what will happen to your repayments if interest rates rise by as much as 1% p.a. to you give yourself wiggle room.
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