In December 2021, 34-year-old Sally* bought her first property – a two-bedroom apartment in Melbourne. The pandemic had been “a really strange time” that made Sally laser-focused on improving her living situation.
“I was really encouraged by all of these think pieces and podcasts that said to get into the market, you have to just be super scrappy, do whatever you can and really sacrifice a lot. But then once you’re in, at least you’ve got an appreciating asset,” she says. “And at that point, Philip Lowe had said that interest rates would not go up before 2024.”
Within a year, Sally had come to regret her decision to buy. Initially, her repayments were $3,300 a month – which was going to be tight, but definitely within her budget. Then came nine consecutive rate rises. Sally’s repayments are now $5,000 a month, almost 70% of her take-home salary. To survive, she has been taking on freelance gigs outside her nine-to-five job and listing her apartment on Airbnb. “I guess I’m doing three jobs now,” she says. Her social life has been put on hold, and she is “living a uni lifestyle again, in my mid-30s”.
“It just feels like I’m locked in this situation now. Because if I were to sell my property, I would lose, I’ve calculated, at least $200,000. So I’d still be paying off a loan, but I would have nowhere to live. So I do feel as though I’m trapped here.
It has been an extremely stressful and frustrating time. “It’s the younger generations who are being penalised by these interest rates – people who really struggled to get into the market in the first place,” she says.
Sally is just one of many Australians feeling the pressure. Melanie Peter, a senior lending adviser at Prosperity Finance Advisers, says that the rate increases have gone above the 3% serviceability buffer that banks test for when assessing loan applications.
That means many Australians are now experiencing mortgage stress – something that will only increase with the further rate rises on the way. And it’s not just mortgage repayments that are putting pressure on household budgets.
“The cost of goods and services have increased and everything these days is just so much more expensive,” says Victoria Devine, author of two millennial-focused money guides. “I don’t think the banks foresaw that.”
So if you’re struggling with interest rate rises, what options do you have?
The first step: call your bank
Devine says you may be able to negotiate a lower interest rate with your current bank by speaking with them. Come armed with some research about competitor interest rates before you call because “the banks are looking after number one,” so they aren’t going to hand out discounts without good reason.
“If you call your bank and just straight out, say, ‘Oh, can you decrease my interest rate?’ They’re probably going to say no. But if you call and say, ‘Well, I saw that this bank has a lower interest rate than you,’ you’re starting to talk to them as a client who’s potentially going to leave …. If you threaten to break up with them, they’re more likely to put you through to what they call a ‘retention team’ and give you a deal that might work out for you.”
Melanie Peter, a senior lending adviser at Prosperity Finance Advisers, says platforms such as Canstar are useful for researching competitor rates. She adds that Macquarie Bank has good carded rates to use as a reference point. And you don’t have to be a loyal customer to make a call – as long as you’re more than six months into your mortgage, it’s worth trying.
Your success rate may, however, depend on your bank. Sally, for instance, tried to negotiate a lower rate but was declined.
“Some [banks] are really open to it and some aren’t,” Peter says. “I’ve had some banks go, ‘Nup, not interested’. Others – ANZ for example – are a lot more competitive. Now that there’s been a lot of refinancing happening and there’s been a lot of runoff, they’re starting to try and retain clients.”
Next: consider refinancing
If your bank won’t give you a better deal, it could be time to look at switching. If you’re willing to cop the admin hassle of refinancing, it might save you considerably.
“There’s over 40 lenders in the market,” Peter says. “[Refinancing] can save some people $7,500 to $10,000 a year. Others might be as small as $2,000 or $3,000 a year. But when you accumulate that over the life of the loan … people are saving $50,000 to $200,000 in interest over the 30-year period.”
Another option when refinancing is to change your loan term. If you’re already, say, five or 10 years into your mortgage, you could stretch that out to a new 30-year term, reducing the monthly cost of repayments.
If you have other debt such as a car or personal loan, you could also inquire about consolidating that into your home loan – which, again, could stretch out a five-year loan term to 30 years. That will lower payments in the short term, leaving you with more cashflow to ride out the next few years.
If the situation is still bad, try switching to interest only
Home loans are generally set up as principle and interest – meaning each month you pay off part of the actual loan, plus a big thwack of interest. But there is the option of temporarily switching to interest-only payments. This may help you to keep your head above water until you can afford to start paying down the mortgage again.
“The Westpac senior economist thinks that for the next couple of years, it’s going to be very tough, and then rates will start to drop,” Peter says. “So I would recommend two years interest only – or three, if you can get it – and if the rates do start dropping … go back into the [principal and interest] at that point.”
Getting approved for interest-only repayments may be challenging – Sally says she enquired about it and was told “there was a very low chance of me being approved, because they are really tightening the reins.” It is also not without administrative headache: “They sent me through the paperwork and said that it’s basically like reapplying for another loan”.
Your last resort: delaying repayments
If things are really tough, you could lodge a financial hardship application with your bank to request an amnesty period from payments. “They are required by law to offer that to clients,” Peter says. The terms of the agreement will look different for every client.
“If someone’s lost their job, for example, they might do it for a six month or 12-month period where they might just be making whatever payment they can, for example, and then when they get another job, they go back to normal payments,” Peter says. At the height of the pandemic, she says, “that happened for a lot of people”.
Jane Wilburn, a senior solicitor with the Financial Rights Legal Centre, says that the bank doesn’t have to agree to give you financial hardship assistance – “but if they decline your request, they should tell you why”. The bank should also inform you that you have the right to escalate your claim to the Australian Financial Complaints Authority (Afca) if you are unhappy with their decision.
“So if they think what you’re asking for from the bank is reasonable, Afca can order the bank to comply,” Wilburn says. While you are undergoing Afca negotiations, enforcement actions such as repossessing your home should be on hold.
If things are getting really tough, Wilburn suggests speaking to a community legal centre to get some advice, or exploring your options in more detail with a financial counsellor. Financial counsellors are not the same as financial planners – they’re a free service available to all and generally work for a charity. The Financial Rights Legal Centre has a financial counsellor search tool on their website, or you can contact the National Debt Helpline for a steer in the right direction.
For now, the best approach may just be to focus on getting through the next couple of years.
“I’ll definitely hold on because that’s the smartest thing to do, but it’s just not a very fun time,” Sally says. “I’m just hoping that my position will be a bit stronger in two years.”
*Name has been changed
