What to do if your home loan interest rate goes up

With interest rates having been on the rise across Australia in recent years, many homeowners are facing increased financial pressure. 

Home loan repayments are typically the biggest regular expense a mortgage-holder faces.

Four in ten homeowners with a mortgage were spending more than 30% of their income on home loan repayments in June 2024, while a third funnelled between 20% and 30% of their pay into their mortgage, according to 1,000 Australians surveyed for InfoChoice's State of Aussies' Savings Report.

That considered, when word of an interest rate hike reaches borrowers, it's no surprise they'd be upset. If you hold a home loan, understanding the steps you can take to help ease the financial pressure if your rate goes up is crucial.

Why do lenders hike home loan interest rates?

There's plenty of reasons that an individual lender might increase the interest rate it charges to borrowers. Its overheads might have increased, its cost of funding might have gone up, or it could simply be trying to increase its profitability.

If a raft lenders all put their interest rates up simultaneously, however, it's likely that the Reserve Bank of Australia (RBA) is to blame.

With Australia's next hike potentially on the horizon, understanding the RBA cash rate and its influence on interest rates could be crucial.

What is the RBA cash rate?

The RBA board uses the cash rate to manage inflation in Australia's economy.

The cash rate is the rate Australian financial institutions must pay to borrow money overnight on the wholesale money market. That's not its only role, but it's likely the most pertinent to everyday borrowers.

Ultimately a higher cash rate means a higher cost of doing business for banks and lenders. To recoup some of this extra cost, they typically jack up the interest rates they charge to borrowers.

The idea is that, by increasing interest rates, the RBA will deter everyday Australians and businesses from borrowing money and encourage them to limit their spending. This, in turn, can help reduce inflation.

To illustrate the relationship between the cash rate and interest rates charged by Australian lenders, here's how the cash rate and the average variable interest rate on a new home loan have tracked in recent years:

How might a rate hike impact your mortgage repayments?

Home loan repayments are generally made up of two components: principal and interest.

The principal is the portion that's used to pay down your debt, while the interest is what your lender charges you to borrow the money.

Lenders charge interest on each dollar owed at a rate per annum (% p.a.). So, if you were to borrow $100,000 at a rate of 5% p.a. and not pay down your debt, you would pay $5,000 of interest each year.

As a home loan borrower repays the funds borrowed through their mortgage, the principal portion of their repayments will grow and the interest portion will shrink. That is, unless their interest rate were to rise, thereby increasing how much interest they pay each week, fortnight, or month.

The average new owner-occupier home loan was valued at around $637,000 in June 2024, as per Australian Bureau of Statistics (ABS) data. Here's what the repayments on an average-sized 30-year mortgage would look like for a borrower subject to various interest rates:

Interest rate (p.a.)	Monthly repayments	Total interest paid over 30 years
3.00%	$2,686	$329,822
3.50%	$2,860	$392,749
4.00%	$3,041	$457,809
4.50%	$3,228	$524,931
5.00%	$3,420	$594,039
5.50%	$3,617	$665,054
6.00%	$3,819	$737,890
6.50%	$4,026	$812,459
7.00%	$4,238	$888,672
7.50%	$4,454	$966,439

Figures courtesy of Your Mortgage's home loan repayment calculator

Looking at the above table, it's no wonder that the 13 rate cash rate hikes put forward by the RBA between mid-2022 and late-2023 made such a dent to some Australian borrowers' finances.

In that time, the typical interest rate on a new variable rate mortgage lifted from around 2.90% p.a. to 6.30% p.a. as of May 2024, according to RBA data.

Looking for a lower rate home loan? Check out these competitive options

If your interest rate has just been hiked, or you don't love the rate you're getting right now, you might want to check out some of these low-rate home loan offerings:

Important Information and Comparison Rate Warning

Rate hikes: Fixed vs variable rates

There's one camp of home loan holders that remain untouched when the cash rate rises. That is fixed rate mortgage borrowers.

As the name suggests, the interest rate on a fixed rate home loan will remain the same for the duration of a fixed rate period. Fixed rate periods typically span between one and five years.

Variable rates, on the other hand, can change, potentially rapidly and often.

If you're worried about the possibility of a rate hike, it might be worth considering fixing your home loan interest rate. Though, there are downsides to doing so.

Fixed rate borrowers can't refinance their loan or sell their property during their fixed rate period lest they face potential break fees. They could also miss out if interest rates are cut, as they'll remain on their original rate while their variable rate peers celebrate.

What to do if you're struggling with a home loan interest rate increase

If your interest rate has been hiked, or your repayments are simply becoming too much, you might hold the power to take some pressure off.

Here are some of the steps you could take to ease the financial strain associated with home loan commitments:

1. Ask for a lower rate

It might sound daunting, but simply asking your lender if it can provide you with a lower rate of interest could be all it takes to reduce your regular repayments.

You might be particularly successful in securing a lower rate if you've been a loyal and reliable customer and you do your homework on what other lenders are offering prior to asking.

2. Use an offset account or redraw facility

Home loan borrowers pay interest on every dollar they've borrowed, with interest typically calculated daily.

Therefore, if you funnel your spare cash towards extra repayments or deposit it in a 100% offset account, you'll reduce the owings on which you're charged interest.

If you have an offset account, you might consider having your salary deposited into it.

If your home loan doesn't have an offset account, a redraw facility offers much of the same benefit, but you won't be able to directly transact in or out of it.

3. Refinance your home loan

Refinancing can be one of the easiest ways to reduce the size of your home loan repayments.

If the interest rate your lender is charging you is higher than that offered by a competitor, you might be able to simply shift your loan to the lender with the lower rate. You may even be able to take advantage of a cash back offer in the process.

Beware, however, that refinancing is rarely free. There are costs associated with refinancing and it's important to carefully weigh those costs against any potential savings.

4. Cut back on your spending elsewhere

Of course, cutting back on your discretionary spending might be the best way to reposition your finances while rates remain high.

Taking notice of your spending habits, creating a budget, and sticking to it can go a long way towards taking the pressure off.

5. Go interest only or take a repayment holiday

If you've implemented all the above suggestions and you're still struggling to meet your home loan repayments, it might be time to reach out to your bank or lender's hardship department.

They could help you to switch to interest only repayments for a time, which could take the pressure off in the short term but will result in you paying more interest over all.

If you've encountered multiple financial obstacles and need some time to get back onto your feet, your lender might suggest a repayment holiday. If you're considering pausing your mortgage repayments, it's important that you understand the risks associated with doing so to ensure it's a worthwhile move in your individual circumstances.

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