Westpac raises interest-only rates as mortgage stress heightens
Westpac is the latest lender to put up interest rates, increasing pressure on interest-only borrowers.
The bank yesterday announced it would increase rates on interest-only variable home loans by 34 basis points to 5.83%, and on interest-only investor loans by 34 basis points to 6.30%.
In a move designed to lure customers into switching to paying principal and interest, the bank reduced its variable rate by eight basis points to 5.24%.
"We understand the significance of interest rate changes to our home loan customers, so we try to balance the needs of both owner occupiers and investors in making these decisions," said chief executive George Frazis.
The bank said there would be no switching fee for customers.
Record numbers of Australians are experiencing mortgage stress, according to research released by Digital Finance Analytics in May.
A quarter of home owners were feeling the pinch when it came to making home loan repayments, and more than 50,000 Australian households were at risk of defaulting on their mortgages in the year to May 2018.
Latest research to come from S&P Global Ratings blames interest rate rises for increased mortgage stress.
Its latest report shows a jump in the number of home owners now more than 30 days in arrears. The report shows an increase from 1.16% in March to 1.21% in April with Queensland recording the greatest growth in 30-day home arrears.
Tips to reduce mortgage stress
Make extra repayments
If you can, avoid interest-only loans. The more of the principal you pay, the more you'll save on interest and the faster you'll pay off your mortgage. Adding an extra $100 a month to your home loan amounts to an extra $1200 a year which, if you keep it up, could result in a mortgage paid off years in advance.
Reduce your loan term
You might believe that a long-term loan is helping you financially by allowing you to make smaller repayments every month. But while you're saving more on repayments, you're paying more in interest over the long term. Consider shortening the term of your loan, and try to commit more of your savings to the mortgage.
Save a bigger deposit
It's a tough ask with property prices in the capitals, but a 20% or more deposit is ideal. The more money you borrow, the more you end up paying in interest over the life of your loan. Do some research on the government subsidies available in your state before you commit to buy.
Use an offset account
An offset account is a savings account linked to your home loan, which can be used to offset the balance of your mortgage. Interest earned by the offset account goes directly towards paying down your home loan interest, which means you won't have to pay tax on your savings. It is a great way of streamlining the repayment process.
Fix your loan
If you're worried that interest rates are going to skyrocket in the near future, consider fixing your loan. While you will have some security against interest rate rises, fixed loans may not allow you to make extra repayments, so you should evaluate whether it will be worth it. Instead, you could split your loan to be 50% fixed and 50% variable, which can help you have the best of both worlds.
The most basic options on the market can save you money by limiting the bells and whistles. Some no-frills home loans advertise interest rate as low as 3.6%pa, which can be great for families looking for a constant low rate. If you're going to pick a basic option, you should evaluate whether it's worthwhile going without extra repayment options or an offset account.
Lenders are competing to secure your business. If the terms of the loan don't suit you, try negotiating. Some places waive establishment fees and valuation costs, which is worth investigating if you're a first-home buyer.