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how do you ease mortgage payment amid rapidly rising interest rates today we're going to go through exactly that we're going to look at how you can optimize your mortgage how you can renegotiate with your lender as well as looking at some alternative options so let's dive in starting off on the top so let's see what's actually going on well as we know there's a lot of action happening with interest rates at the moment they're rapidly rising and set to continue to increase so there's calls for borrowers to take action and cut costs on their mortgage particularly with raising rates and alarming levels of interest rates so households are actually facing um supersized consecutive interest rates that are coming up in the ensuing months they're actually saying the cash rate could hit 3.35 by november if we have a look here at westpac's forecast which has recently been updated the official cash rate as we speak is at 1.35 percent there's pretty much um their prediction saying that the cash rate officially will get up to 3.35 by march next year and interesting to see that by 2024 they're predicting that things will start to reverse course uh a lot of experts are saying there's going to be a rate rise next month in august of half a percent another one in september so we can potentially see another one in the very short term with rates slowly going upwards to that 3.35 percent uh sometime between now and late this year or early next year what this actually means for borrowers is if you've got a modest mortgage even if it's only five hundred thousand that means if rates actually get to that three point three five percent payments gonna increase 968 dollars per month and those that have a million dollar mortgage well that means another 1938 dollars per month out of what is already a very tight household budget with cost of living increases a number of different factors fuel being quite expensive now mortgages on top of that some of the other big four banks of predicting the cash rate might only get to the 2.6 percent in november as we said here westpac's sort of saying by november december they're thinking 3.1 in any case they're all sort of predicting rates are definitely going to go up now um financial expert stephen mackenbecker has said that starting to cut costs out of your monthly budget budget is the priority and you should start looking at preparing for things like high repayments and start with a little bit of research and look at doing a bit of paperwork so with rising rates it should be a priority to look at lower cost home loan options and put that on the shopping list so especially as rates are set to go up another 1.25 percent um already we've seen in the last three months 1.25 increase and as we talked about earlier half a percent increase in august is expected with another half a percent coming up in september so let's look at some practical tips on how you can get through this one thing is what we are seeing is some of the uh borrowings that are happening with the banks will start to potentially get tougher and tougher we're seeing a little bit of new data from apra talking about the bank's exposure to what they call risky loans so when there's a debt to income ratio above six times they're saying in the december quarter of late last year 24.4 percent of new mortgages written had a debt to income ratio six times to be honest that debt-to-income ratio wasn't really policed at the end of last year so i can see why that was quite high we really found at the start of this year a lot of the banks started to tighten up the screws and become more aware of this and i guess this data shows that you know there was a significant increase as such the regulator came in last year uh september's quarter had a 23.8 dec income ratio above six so what we're going to find is it might even be that the banks tighten the screws a little bit more to make it that much more of a challenge to secure funding because apra considers a debt to income ratio above six as a risky loan we still have many lenders that are absolutely fine with debt to come ratios above six but we are finding some of the smaller lenders are really cracking down on that now what does that mean if you were to look at a debt to income ratio with medium house prices above six well in sydney you need a household income of 188 000 or over to avoid being classed as a risky loan now a lot of cases you know that's a fairly high household income and that's where we're going to see that with the prices still elevated you know these debt-to-income ratios might still follow suit now we did also find that abs had data recently talking about last year as recording the biggest annual uh rise on record so there was a 23.7 percent increase across the nation in terms of property prices and no doubt you know that was all over the news that we've seen that recently with um prices and how quickly they've gone up now let's talk about some solutions here if you are struggling with mortgage stress amid rapidly rising interest rates let's talk about some practical solutions now first is optimizing your offset account now i don't necessarily agree with just an offset account you can do the same thing with a redraw i'll explain the differences in a minute but the main thing is put your savings to better use so if you do have for example ten thousand dollars sitting around in a different account in a savings account earning you very little interest what you can do with that money is use it to either offset or put against your loan so effectively then you're not paying the bank let's say if you're on a 3.6 interest rate you're not paying them that you're saving that which effectively means you shave 400 off each year on your interest bill that you'd otherwise pay the bank so i think that's perfect in terms of being able to reduce costs if you had 50 grand well that's going to be 2 grand a year now i just want to touch on the differences between offset and redraw and show you that they're pretty much the same thing so in this example here we've got a loan of 500 000 now in uh an offset environment this is where effectively you've got an offset account which is still transactional but the major difference is there's a linkage so that the offset is linked to the mortgage so any money you have in the offset account will automatically reduce the interest that you'd otherwise charge so instead of the bank calculating interest on 400 500 000 each day and charging it monthly what they do in this example is go the loan less what's inside the offset account well we're only going to charge you interest on 490 000. if you kept that in there for the 12 months well then that's where you save the 400 per year in interest the more you have in the offset account the more interest you save so that's where putting money against the loan can make more sense rather than putting it in a savings account where you might only be getting one percent interest and paying tax on that because you've earned interest putting in an offset account you can save not paying the bank that 3.69 in interest now in this very same example we have redraw these two do the exact same thing the major difference with redraw is as we can see here there's no linkage so what you have to do is you have to actually transfer your ten thousand dollars that's in your transactional account park that in the home loan so you park the ten thousand dollars in the home loan account effectively the bank would calculate that you've made an overpayment so interest is only charged on 490 and then you still have access to it because it's a prepayment that you've made additionally on top of the minimum repayments so same same you're still getting charged on 490 but effectively you can take that back out when you need it and then transaction from that both do the same thing slightly different in terms of the way you arrange things typically with an offset account there are annual fees and charges with a redraw you can set up very basic no monthly fees usually lower rates so they're ways that you can further optimize your cash that you have sitting in your account to better reduce interest option number two is switch to a no-frills loan so we talked about the fact that a lot of times if you have an offset account you'd be paying an annual fee usually that's 3.95 you pay a higher interest rate and you know you've got all the bells and whistles you get a credit card all that sort of stuff but there's inherent extra costs associated where if you switch to a redraw effectively you can get the same look and feel with the lower costs now just keep in mind if you are fixed in a lot of times you can't have an offset account a lot of times there isn't redraw so this is more specific to variable loan options but i guess yeah we'd encourage those looking out there to review their existing rate you know if you're paying anywhere from high threes or anywhere in the fours there's definitely avenues where you can refinance get a cash back incentive and switch to it cheaper costs so i think it's definitely worthwhile to look at switching to a cheaper cost option so now i guess based on some data that canstar has they suggested that an interest rate cut so reducing your loan by about 1.36 percent you'd shave about 400 per month off your mortgage so there is definitely a lot of costs you can save there so between optimizing your cash revealing your loan to get a better rate there's money to be sort of saved in in doing so now another option is negotiate your mortgage with your existing lender like you're a new customer so a lot of times what we do find is the banks give new customers better rates than existing customers so um it's pretty important to have a chat with your lender try and negotiate to see if you can get but get um get a better deal some other things you can do is even fill in a discharge request and pretty much tell the bank leaving so um it's a form it's pretty easy to find if you want to look it up look up your bank and then discharge fill it in sign it send it to the bank and let them know you're leaving and see if they come back to you with their on their knees and say that you know don't leave us we'll give you a good deal so what we do find is based on can stars data they're saying that most existing borrowers are paying you know 0.46 percent higher compared to new lenders or new borrowings for the same customer so that means you're out of pocket by 123 per month in additional mortgage repayments or 44 000 more over the life of the loan so it definitely pays to try and negotiate with your lender there that's something we can also help with so if you've got a mortgage and you're wanting to have a chat and find out if there is anything your existing lender can do hit us up and we're definitely happy to have a chat one thing to keep in mind is also think about steering clear from interest only now whilst it may feel like you're paying less in terms of your monthly repayments it actually means you pay more over the life of the loan and you'd also find that there will be repayment shock once the interest only ends so what does that actually mean well let's look at a mortgage repayment calculator and let's say you've got a six hundred thousand mortgage let's say you've got a really good deal you're paying three percent interest only well three percent interest only you're only paying fifteen hundred dollars per month in loan repayments which is an absolute steal but you've got to remember a lot of times your mortgage starts off on 30 years it's five years interest only so once your interest only period ends you'll be on a 25-year loan term and there will be a massive repayment shock you go from 1500 bucks per month to 2800 ford uh 2845 in terms of the monthly repayments but not to mention you pay a lot more interest when you're paying interest only so what we always recommend look to set up as principal and interest at least you get used to the repayments you're slowly paying down the loan and chipping away at it and it means that you're not going to be up for any repayment shot or any nasty surprises once the interest only period ends now in circumstances where you're struggling you're finding that you can't really make ends meet well that's where it's definitely advisable not to bury your head in the sand have a chat with your lender there are options out there so if you're finding that your bills and your loan repayments are exceeding your income well you need to talk to your bank and talk about financial hardship and seeing if you can come to an agreement or an arrangement whereby they can go you can negotiate with your bank and have an agreement to defer or reduce your payments restructure your loan or even change to interest only now i know we said don't do interest only just earlier but this is more where you're in a real pickle and you need to get out of it and potentially a little bit of time and we saw this over covered where there are a number of people in certain industries pilots hospitality they were out of work they made these arrangements and they're able to keep their home so definitely wise to talk with your lender keep communication open because if you keep quiet bury your head in the sand that's when the bank can get a little bit cranky and knock on your door there's avenues out there there's a national debt hotline you can call the number here 1-800-007007 where they can help we're here at hunter galloway our mortgage brokers so if you are having issues with your mortgage you want to see if you can reduce costs you want to have a chat about renegotiating with your existing lender or looking at setting up an offset or understanding redraw a bit more hit us up to huntergalloy.com. we're based in brisbane we're mortgage brokers there's zero cost for our service we deal with people australia-wide so if you're in perth adelaide sydney melbourne we definitely can help looking to refinance looking at releasing equity to do some renovations or even buy an investment or an owner-occupied property call us on one three hundred zero eight zero six five or visit us at huntergalloway.com and we'll see you next time [Music] you