As we’ve posted about here and here, in response to the RBA increasing the cash rate over consecutive months, lenders have increased their borrowing rates. And as you would be acutely aware, this means interest costs on your home loan have increased, along with a jump in your home loan repayments.
But if you’ve been keeping a close eye on your internet banking portal, you may have noticed that your actual repayment amount hasn’t changed yet.
You can see the interest rate has gone up.
You can also see that interest amount related to your last repayment increased too.
But your actual monthly repayment amount may be the same as it was earlier this year.
Why is that? Let’s look at this a little closer….
If rates have increased, why haven’t your home loan repayments increased too?
Each lender has their own way of handling interest rate changes, so it’s important you review your internet banking to see what’s happened with your own loan.
But here’s a rundown of what typically happens with a rate increase…
The lender announces their rates are changing, what the new rate will be and the date this new rate will come into play – this date is otherwise known as the “effective date.” You will be advised of the rate change via a letter, email and/or an alert that appears on your internet banking portal.
On the effective date, a notation often appears in the loan account itself, confirming your new now-higher interest rate.
From the effective date onwards, interest is calculated at this higher rate. Which means that typically, the first repayment after a rate change will be calculated in two parts.
The first calculates the interest incurred from the date of your last repayment to the day before the rate change. This is calculated using the old interest rate.
The second calculates the interest incurred from the effective date to the repayment date. This is calculated using the new, higher rate of interest.
The lender then adds these together to determine your total interest cost for that month (or repayment cycle).
For the second repayment after a rate change, interest costs are calculated using the higher interest rate only – because this new rate has been effective for the entire month.
If you look at the repayments made to your loan over the last few months – notwithstanding the effects of using an offset account – you will notice that your interest costs have increased. This makes sense and is completely expected, given rates have increased over this time.
But lenders are often a little slow in processing changes to the repayment amount. (As an aside, the same thing happens when interest rates fall – but in reverse.)
In fact, some lenders only recalibrate loan repayments a few times a year – regardless of what happens to rates in the meantime. The lenders we’ve spoken to about this advised there’s not always a set date for this to happen. This recalibration (also known as a re-amortisation of repayments) happens periodically – whenever the lender chooses.
Lenders advise they they want to give borrowers ample time to prepare for the repayment increase, but their reasons may be more closely related to resource constraints and system limitations. Whatever the reason for delaying the adjustment in repayments, it’s important you’re aware what’s happening with your own loan and the effect (or nil effect currently) it’s having on your cashflow.
If you thought you were managing the rate increases ok – and you haven’t noticed much of an impact in terms of cash – it might be because you haven’t actually had to make any higher repayments yet!
If your repayment has technically increased but you’re not actually making higher repayments, does this mean you’re behind on your loan?
Kind of, but also not really.
You’re not really ‘behind’ on your loan, if the lender has chosen not to recalibrate your repayments immediately. Once the loan repayment has increased in accordance with the higher rate, everything will even itself out.
Until the repayment amount increases to match the higher rate, you won’t be paying as much off the principal with each repayment. (Because the repayment is still based on the lower rate, and the interest is being calculated at the higher rate.)
Given it’s likely that only a few months will pass before the lender changes the actual repayments, the effect of this is generally small. And if you’re using an offset account, the effect is likely to be even smaller – providing you’re building up surplus cash in your offset account.
If you would rather have the repayments recalibrated sooner than later, you can do this directly yourself via internet or phone banking. Alternatively, you can simply wait for the lender to adjust them for you.
Just be aware that if you haven’t felt the effect of the recent rate rises yet, it’s likely to hit your bottom line soon enough.
(And if that has you concerned, maybe it’s time to book in for a home loan review with us sooner rather than later.)
