Many of us embraced first-time home ownership when interest rates fell to historic lows in Australia and New Zealand in 2020, however with rates now firmly on the rise, mortgage holders are feeling the pinch. According to Canstar, Australian borrowers with a $500,000 mortgage over 30 years were paying about $888 more per month to cover their repayments in December than they were in April, a big hit to the household budget.
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What causes high-interest rates?
The central banks of each country have the job of providing financial stability for households, and also keeping inflation in check.
A major way the banks can control inflation is to alter the cash rate, which banks use to determine mortgage rates. When they put the cash rate up, it takes demand for money out of the markets as borrowing money is now more expensive. In times of slow economic growth, the central bank can cut the cash rate to make money cheaper and stimulate the economy.
Post-Covid, inflation has been at levels not seen in more than 30 years. This is due to many reasons, including supply chain issues, the war in Ukraine, and adverse weather events – as well as the incredibly low cash rate unchanged for nearly 18 months at 0.10%. On the other side is that many households have had lots of cash saved up after two years of lockdown and travel restrictions.
When are rates expected to come down?
Unfortunately, there is no crystal ball that can tell us when interest rates will either plateau or start to come down, as the cash rate is so dependent on factors outside the control of any single bank or country. Some economists have said that it is 'extremely unlikely' that rates will fall in 2023. Several banks told Canstar that they expect rates to peak in March-April 2023 in Australia before slowly softening in 2024. In any case, you're likely to have to keep a tight budget for the near future.
Relieving financial stress
If you are facing a rise in your mortgage rate, it can be stressful and may cause concern about your ability to afford your monthly payments. However, there are steps you can take to manage the impact of a rate rise on your finances:
Review your budget: Look at your current budget to see where you can cut expenses and redirect that money towards your mortgage payments.
Consider refinancing: If your mortgage rate has increased significantly, you may be able to refinance your mortgage to a lower rate. This can help reduce your monthly payments and save you money in the long run.
Make extra payments: If you have the financial means, making extra payments on your mortgage can help you pay off your loan faster and save on interest.
Consider a mortgage holiday: If you are facing temporary financial difficulties, you may be able to negotiate a mortgage holiday with your lender. This allows you to temporarily pause your mortgage payments, which can provide some relief while you work to get your finances back on track.
Seek financial advice: If you are struggling to cope with a mortgage rate increase, it may be helpful to speak with a financial professional or a mortgage broker. They can help you review your options and provide guidance on how to manage your mortgage payments.
Finally, it is essential to communicate with your bank if you are struggling to make your mortgage payments. They may be able to work with you to find a solution that fits your needs.
If you have any questions or need extra support, we're here to help you anytime in any language. Simply start a chat with us via the home screen of the Sonder app.
Information sourced from: Canstar, Infochoice, Ratecity, AFR.
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