Borrowers are likely to continue to feel the pressure of rising rates and costs of living over the year ahead, but certain strategies can help them overcome some of the common challenges.

Rate Money CEO Ryan Gair said the year would be particularly challenging for borrowers with lack of equity and those coming off fixed-rate loans — his biggest tip is to reduce debt as much as possible.

“The more, and quicker, you can pay it down, the more equity you will have to draw from in tougher times,” he said.

“Working with lenders who are agile and flexible, and experts who can guide you along the journey, will also help to alleviate stress and hardship.”

Mr Gair shared five specific strategies to handle some common problems arising from the surge in borrowing and living costs. These are:

1. Consolidate debt

Consolidating personal debts into one repayment under a mortgage would help borrowers pay at a lower interest rate, especially as rising rates shrink borrowing power.

“If you have a car loan at 8% interest over five years, rolling this into your mortgage will see the repayments be spread across a 30-year loan at around 5% interest instead,” Mr Gair said.

It is, however, crucial for borrowers try to pay this back as quickly as possible to not end up accumulating more debt.

Lenders are assessing borrowers differently now than before the successive rate hikes started in May. Back then when 2% rates were still normal, borrowing capacities are assessed based on a 5.5% rate.

At the current state of the cash rate, the serviceability buffer is much higher at 7.5% to 8%, ultimately reducing the amount many would-be mortgage applicants can borrow.

2. Negotiate with lenders 

Reaching out to lenders to negotiate a more competitive arrangement with your current loan is a must for new homeowners with smaller deposits according to Mr Gair.

Given the market downturn, many of these new homeowners could be trapped in a mortgage prison. They lack equity and could be stuck on a high interest rate with their current lender.

These borrowers are also likely to pay lenders mortgage insurance, which could cost tens of thousands of dollars/

“If you’re in this situation, call your bank and say you’ve found a better rate with another lender, but you would like to remain with them and negotiate a better deal,” Mr Gair said.

“The majority will come to the party and give you a better rate so they can keep you as a customer.”

3. Consider an interest-only repayment

Fixed-rate borrowers whose terms are maturing this year are facing a significant increase in repayments as rates have more than doubled from the lows during the pandemic.

Borrowers whose equity is at least 20% can put their mortgages on an interest-only repayment terms for the next two years to help them adjust.

“There are certain lenders who offer this — moving to interest only will allow you to reduce your monthly repayments for a short term and free up cash flow,” Mr Gair said.

However, interest-only payments can result in more interest paid over the long term, and also condense principal payments into a shorter timeframe, increasing repayments after the interest-only period is over.

4. Deal with missed repayments

Missing mortgage repayments results in a red flag to a borrower’s credit report. Not only would missed repayments affect the chances of refinancing, it would also impact the a homeowner’s capacity to borrow in the future.

Mr Gair said borrowers who were not able to make their repayments on time must contact their lender and request to not include the instance in their credit reports.

“Banks and financial institutions want to work with you to find a solution, so ensure you keep a clear and open line of communication and return any calls or emails you may receive,” he said.

5. Cut back on spending

Self-employed borrowers typically experience cash flow problems during the start and end of the year as businesses close down over the holiday period.

Mr Gair said the only workaround for this group of borrowers is to cut back on spending for them to be able to free up some cash flow to make their mortgage repayments.

“In the building and construction industry, for instance, many subcontractors won’t have a source of income unless they have another job on the side,” he said.

“To help you get through this period and create as much cash flow as possible. This might be heightened even more with interest rate rises.”

Photo by Andrea Piacquadio from Pexels.