With interest rates expected to begin rising while the cost of living continues soaring, a new survey from financial information platform Money.com.au has revealed just how prepared Australians are to meet their mortgage repayment obligations. The good news is that 80 per cent of respondents say they have a buffer in their home loans to meet the coming rate rises.
The finding was derived from a survey of an independent panel of 1018 Australian mortgage holders, commissioned by Money.com.au. The survey found that around 14 per cent of respondents have more than $100,000 in funds in a mortgage offset account, redraw facility or savings account; one in four (28 per cent) had more than $50,000; and 41 per cent had more than $20,000. The full survey results, with age and State breakdowns, can be found here: Home Loan Buffer Study.
Licensed financial advisor and Money.com.au spokesperson Helen Baker says: “The research also found that 20 per cent of borrowers had no buffer at all. There are many circumstances that might have left borrowers in this situation. Jobs in some sectors were impacted heavily by covid and some borrowers might have been living on their savings while getting back on their feet. A small proportion might not be proactive savers. Others might have used their savings buffer to clear some debt rather than borrow a higher amount and retain a buffer on a new property. Older borrowers may have also used their buffer to re-invest in property while interest rates were low.”
Younger borrowers have more in their offset accounts
Money.com.au found that a larger proportion of older mortgage holders have no buffer. One in four (28) per cent of over 50s, compared with 9 per cent of 18-34-year-olds and compared with 24 per cent of 35-49-year olds.
Helen says: “Older borrowers can access their super, which translates to a type of savings buffer, and a bigger proportion are also closer to paying off their mortgages, reducing their risk around loan repayments. Conversely, younger borrowers have decades in repayments ahead of them, with potentially kids and other financial commitments on the horizon – hence their need to have savings in place.”
Money.com.au also asked respondents if their financial buffer will help them cope with interest rate rises. The good news is that the majority (84 per cent) revealed they would still be able to make loan repayments with a rate rise. Specifically, two thirds (63 per cent) said they can meet repayments with at least a 0.5 per cent rise, half (49 per cent) with at least a 0.75 per cent rise, and one third (34 per cent) with rises of 2 per cent or more.
Older borrowers can better cope with rate rises
The results also revealed that the older the borrower, the more easily they can make repayments against higher interest rates: 37 per cent of over 55s said they can make repayments if rates rise by 2 per cent or more, compared with 25 per cent of 40-54-year olds and 20 per cent of 25-39-year olds.
Helen says: “The research suggests a strong proportion of Australians are financially savvy and may have already been proactively preparing for expected increases in interest rates and the cost of living during the life of their home loan, as well as future changes in their personal circumstances that would impact their income, such as starting a family. Many may have known that the era of cheap money would eventually come to an end.
“A mortgage is one of the biggest commitments and ensuring you have some bulk savings reducing your interest is an excellent first step. Getting the financing right on your mortgage is another important strategy, and there are lots of ways that borrowers are structuring their financing to suit their current and future financial circumstances, as well as future rate rises.”
Helen Baker shares ways that borrowers are reducing the impact of rate rises:
1. Many borrowers hold some savings back from their deposit or home loan. When buying a property, many borrowers keep a cash reserve that they can utilise in the case of interest rate rises or a future drop in income.
2. Some borrowers access different types of loan to suit their financial circumstances. While you cannot split your property financing between banks, you can split the financing across different loans at the one bank to suit your savings and repayment structure. Some loans allow for an offset account to help borrowers reduce the interest, while others offer cheaper rates but no offset account or redraw facility.
3. Some savvy borrowers structure their financing to suit their savings and repayment patterns. These home buyers split their financing into two to three loans to reduce interest over the short term. Some with a larger cash reserve get a variable-rate loan that is offset in part or full by their savings. The next variable-rate loan would be equivalent to the amount the borrower can realistically repay and offset over the next two years. They fix the third loan – the loan balance – for five years, after which they can start offsetting. It is important to seek advice on whether this strategy could work for your individual circumstances.
4. Make an educated and informed forecast on rate rises. Right now, interest rates on variable loans are at least 1 cent lower than fixed-loan rates. Do you stay with a lower variable rate or lock in a higher fixed rate, believing that both types will be much higher in the next year? Helen says that, while the banks will have already priced in the RBA’s cash rate increases in their fixed loan rates, they may continue to make changes. There is a bit of risk taking here, and you will need to guess for how long and by how much rates may rise.
5. Consolidate your debts. You might be in control of your mortgage but your credit cards and loans on large purchases (such as your wedding or furniture) might be lagging. Mortgages have the lowest interest rates of any credit line or loan type. If possible, consider consolidating your other debt with your home loan to reduce the interest but be aware that this loan is over long term, so work hard to pay the extra off quickly. Just ensure you maintain at least 20 per cent in equity in your home loan so that you don’t need mortgage insurance.
6. Pay your mortgage fortnightly. Your home loan charges interest daily on your principal balance. Paying fortnightly or weekly – if your income is paid to you fortnightly or weekly, or you can draw from your savings buffer – will have you reducing the principal faster, and therefore the interest.
7. Weigh up the benefit of mortgage offsetting against the tax benefits of super. Mortgage offsetting isn’t the only avenue to leverage your savings. Can you get a better return by putting some of your savings into your superannuation? For instance, if your income meets the 39 per cent tax rate, you can save 24 per cent in tax on any portion (in that tax bracket) you put into your super. This means, if you put $10,000 pre-tax income into your super, you will be taxed at just $1500, making your super contribution $8500. That same $10,000 would be $6200 after income tax in your mortgage offset account.
The full survey results, including across age groups and States, can be found here: Home Loan Buffer Study