Rate rises: what you should do now if you have a home loan

Getting ahead on your mortgage repayments now can help ease the pain of future rate rises. Picture: Shutterstock.
Getting ahead on your mortgage repayments now can help ease the pain of future rate rises. Picture: Shutterstock.

The inflation figures for the first quarter are out, and they won't surprise you: we are all facing increased fuel expenses, huge supermarket costs, and a general shortage of almost everything else.

The consumer price index (CPI) is made up of 87 separate expenditure classes, which include everything from beer and books to haircuts and holidays.

In the last quarter, 70 of these classes increased. That is the largest number in the entire history of Australia's CPI.

Rates on the rise

The Reserve Bank has already started raising rates to damp down inflation.

They increased them by 0.25 per cent on Tuesday to get households used to a changing interest-rate environment.

But expect a bigger one to follow quickly - probably around 50 basis points.

So what should you do now if you have a home loan?

The answer is clear: get ahead on your repayments.

This will have three major benefits: it will give you a safety buffer, you will get used to making higher repayments, and your loan will be paid off much faster, if rate rises are not as big as many economists are predicting.

A simple strategy is to increase your home loan repayments at least $560 a month for every $100,000 borrowed, or $2240 a month for a loan of $400,000.

This is based on an interest rate of 4.5 per cent a year on a 25 year term.

If you are paid fortnightly, you can create an extra safety buffer by paying $280 a fortnight for each $100,000 borrowed.

Then, put any spare funds you have in an offset account. This is highly tax-effective, because your money will be receiving an effective after-tax rate equivalent to that charged on the mortgage.

That is, if your mortgage rate is 4 per cent, money parked in your offset account gives you the equivalent of a capital-guaranteed 4 per cent after-tax return.

Is this the time to switch to a fixed rate?

Is this the time to switch to a fixed rate? Not necessarily.

It would give you some certainty for the period that you fix the rate, but remember you always pay for insurance. Your fixed rate will probably be higher than your variable rate, and if you need to quit the loan before the term is over because of a change in circumstances there may be heavy fees.

So unless you are extremely nervous, my preference is to stay with a variable rate, and use all your resources to pay it back faster and/or accumulate as much as you can in the offset account. As always, preparation is your best friend.

If you are in the market for your first home, it may be worthwhile taking your time, unless you come across a bargain.

Rising rates put pressure on people with mortgages, and also reduce the loan potential buyers can qualify for. This combination can only have a negative effect on house prices.

This is also a time to be particularly wary of getting trapped with buy now pay later schemes, or excess credit card debt.

Seldom do people get into financial strife with one single transaction - it's the build-up of many small transactions that eventually breaks the camel's back.

Remember, a house is one of your greatest assets - don't lose it because of bad money management.

Noel answers your money questions

Question

What sort of advice would you give for those of us in our early 20s who are at crossroads about what to do with our wages and salaries in the early years. Shares? Investment property? Superannuation?

Answer

For starters, I recommend you begin a relationship with a good adviser at an early an age as possible. This will get you experience in a range of assets and strategies while you are young and maximise the effect of compounding.

For most people a simple option is to make home ownership the first goal - once you have the mortgage under control you can consider borrowing against the home for investment in quality share trusts.

I don't recommend superannuation for young people because of lack of access for such a long time, but I certainly recommend you are well insured, and have wills.

Question

I am 66 years of age and receiving an allocated pension from when I retired from paid employment. I am selling my investment property and will be making a profit of around $100,000. If I deposit $50,000 into a superfund which has a balance of $330,000, will I be liable to pay the capital gains tax?

Answer

If the property has been held for over a year you are entitled to the 50 per cent discount on CGT which means $50,000 of the $100,000 capital gain will be added to your taxable income in the year the sales contract was signed.

You can reduce your taxable income by making a deductible concessional contribution to super, but these are limited to $27,500 a year which includes the employer contribution.

However, as your superannuation balance is under $500,000 it may be possible to use the catch-up concessional contribution strategy which would allow you to increase the $27,500 due to contributions not made in full since 2018. Talk to your accountant.

Question

My wife and I are self-funded retirees and have attempted to apply for the Commonwealth Seniors Health Card on line via Commonwealth Seniors Health Card (CSHC). The process is difficult and takes you around in circles. There appears to be no link to the on-line Application Form from My-GOV website and the help desk is also of no use. I did manage to find a PDF Form that can sent by mail to the Department of Veterans Affairs however this appears to be for Veterans only. I just wish that MY-GOV would simplify their website.

Answer

Services Australia General Manager Hank Jongen says that claiming a CSHC is a straightforward process, but how someone claims will depend on their circumstances and preferences. If you're a couple, and applying for the CSHC online through myGov, each eligible member of the couple will need to submit their own online claim for a CSHC.

Applicants who choose to claim a CSHC online will need to provide information about their partner's income, as the CSHC income test looks at combined income for couples. It's important to note that providing this information doesn't mean that Services Australia will automatically process a CSHC for their partner as well. Alternatively, a paper claim form is available for people who need it. Where the paper form is used, each member of a couple can both claim a CSHC at the same time within the one form.

Question

If my mother sells her house for $700,000 and repays the mortgage of $500,000, from the sale proceeds could she contribute $300,000 as a downsizer payment or is she limited to $200,000 being the difference between $300,000 and the net proceeds.

Answer

John Perri of AMP Technical has good news for you - provided the property sale satisfies the normal criteria such as the house must have been owned for 10 years, and the contribution must be made within 90 days of settlement, she could contribute $300,000 as a downsizer contribution if she has the funds available. It's not limited to the net proceeds from the sale.

  • Noel Whittaker is the author of Retirement Made Simple and many other books on personal finance. His advice is general in nature and readers should seek their own professional advice before making any financial decisions. Email your money questions to noel@noelwhittaker.com.au
This story How you can prepare your home loan for future rate rises first appeared on The Canberra Times.