Rates Are at an 18-Year High: What Lawyers Can Do about their Home Loan

Higher incomes often come with larger loans, and partners and barristers can have uneven cash flow and tax bills, so a rate rise still needs a plan. The RBA raised the cash rate by 0.25 percentage points to 4.85% on 3 November. You can't control the cash rate, but you can review your loan, your budget and your options.

Key takeaways

• Check your new repayment amount and the date it starts.
• Ask your lender for a lower rate before you consider switching.
• Compare the total cost of refinancing, not just the new rate.
• Consider a cash buffer in an offset account.
• Contact your lender early if repayments become hard.

What the rate rises mean for your repayments

A higher cash rate raises repayments on variable loans, and the size of the increase scales with your loan balance. The RBA lifted the cash rate to 4.85%, its fifth rise this year (1.25 percentage points in total) and the highest level in 18 years.

Example: $600,000 loan, rate rises from 5.50% to 6.75%

This is an illustration only. On a $1.2 million loan, the increase would be roughly twice as much.

Variable loans change now, while fixed loans change when the fixed term ends. Your lender sets when a change takes effect.

Know your numbers before you call your lender

Before you contact a lender or broker, gather your current rate, loan balance and remaining term. Add your estimated property value and your LVR (loan-to-value ratio, which is your loan as a percentage of the property's value), plus any fixed-rate expiry date and your new repayment amount and start date.

Lawyers should also prepare a few extra details:

• Separate your base salary from bonuses, because lenders treat them differently.
• If you are a partner, principal or barrister, note how you receive income (drawings, partnership or trust distributions) and have your latest two years of tax returns ready.
• Add up your total debts across all loans, including investment loans.

Our Loan Health Check uses these same details.

Ask for a rate review, or consider refinancing

The quickest step is to compare your rate with what your lender offers new customers and ask for a lower one. Having at least 20% equity and a good credit score can help your case, and our guide to getting a lower interest rate covers the approach.

If your lender won't move, refinancing is the next option, and a broker can compare loans across a panel of lenders. Costs can include discharge, application, valuation, switching and fixed-rate break fees, plus possible stamp duty. Moneysmart has a mortgage switching calculator, at no cost, that shows how long it could take to recover those costs.

Banks and other APRA-regulated lenders also assess whether you can afford repayments at a higher rate than the one you are paying. Non-bank lenders set their own assessment rules.

Falling property values can reduce your equity and affect your LVR, pricing and LMI. LMI (lenders mortgage insurance) is a one-off cost that may apply when you borrow more than 80% of the property value, and it protects the lender, not you. If you have less than 20% equity, ask whether part of the LMI on your current loan can be refunded.

Restarting a 30-year term can increase your total interest. Keep a similar remaining term, or keep your repayments at the same level, to limit that.

For larger refinances or equity releases, APRA's debt-to-income limit can matter. Since February, APRA has limited lending at a debt-to-income ratio of six or more to 20% of each bank's new mortgage lending. This is a limit on each bank's lending overall, not a personal cap.

Self-employed partners and barristers are usually assessed on tax returns and financial statements rather than payslips. Lenders vary in how they treat distributions and fluctuating income, and our page on self-employed loans for lawyers explains more.

Can lawyers avoid paying LMI?

Many lenders waive LMI for legal professionals, which means LMI would normally apply but isn't charged because of your job. Others offer lender-paid LMI, where the loan is still insured but the lender pays the premium, which is reflected in the pricing. Here are examples available at the time of writing, and a lender missing from this list may still have an option, as not every lender has been reviewed. Our page on LMI waivers for lawyers has more detail.

Lenders that waive LMI for legal professionals

• ANZ: up to 90% LVR on new or increased lending for lawyers, solicitors and barristers with a current practising certificate, and for judges and magistrates. Because it covers increased lending, it may help with an equity release.
• Westpac, St.George, Bank of Melbourne and BankSA: up to 90% LVR for legal professionals, subject to accreditation and income tests.
• CBA: up to 89.99% LVR for lawyers, solicitors, barristers and partners with a practising certificate earning at least $100,000, and for judges and magistrates. It needs a Mortgage Advantage Package, which carries an annual fee, and principal and interest repayments.
• NAB: up to 90% LVR for lawyers and solicitors with a current practising certificate and barristers with a current bar association certificate, up to $4.5m per property and $7.0m in total. It excludes owner-occupied interest-only loans, company and trust borrowers, and some high-risk postcodes.
• Bankwest: for PAYG lawyers, solicitors, barristers and partners with a current practising certificate, up to 89.99% LVR for loans to $2m or 84.99% LVR for loans to $3m, with a $5m limit per borrower. It covers purchases, refinancing, construction and renovation, on principal and interest only.

How to compare them

• CBA and Bankwest require principal and interest repayments, and NAB excludes owner-occupied interest-only loans, so you may need to switch if your loan is interest only.
• Bankwest's waiver is for PAYG employees, so self-employed principals should check eligibility.
• A waiver saves the LMI cost, but compare the rate, fees and features too. If an equity release takes your LVR above 80%, check these options before you apply.

Lender criteria change often, and a broker can check which options you qualify for. All lending is subject to credit approval.

Structure your loan: splits, offsets and equity release

A split loan divides your debt into a fixed portion and a variable portion, and an offset account is usually linked to the variable portion. An offset account reduces the balance charged interest while keeping your money accessible. The money in an offset doesn't earn interest, and offset loans can come with higher rates or package fees. Access to redraw depends on the loan terms.

Some borrowers may be able to increase their loan when refinancing and hold the extra in an offset as a cash buffer. Our page on equity release loans for lawyers covers how this works.

Example at 6.75% over 30 years

The interest saving falls as the buffer is spent, so the extra repayment can exceed the saving. This is an illustration only.

Before you proceed, check these points:

• The lender assesses the higher loan amount and may ask how the funds will be used.
• Costs can include refinancing fees, break costs, package fees and offset fees.
• The offset should be 100%, not partial, and correctly linked to the loan.

If the release takes your LVR above 80%, see the LMI section above.

Interest deductibility depends on the purpose of the borrowing, so speak with your accountant before restructuring. If you hold investment properties or receive income through trusts or partnerships, get tax advice first, because mixing private and investment purposes in one loan can complicate deductions.

A buffer is a safety net, not spending money, and it won't fix repayments that are already unaffordable. Make extra repayments only if your household can afford them. Bonuses and money set aside for tax can sit in an offset to reduce interest until needed, as long as the tax money is available on time.

Tighten the household budget

Reviewing recurring costs can free up cash for higher repayments. Check subscriptions, insurance, energy and phone plans.

Credit cards and buy now, pay later can add monthly pressure. Debt consolidation may lower repayments but stretch the debt out, so weigh the lower monthly cost against the longer term. Build your core budget on base salary or reliable drawings, treat bonuses and distributions as extra, and plan for tax payments.

Fixed, variable or split?

Fixed rates give repayment certainty, while variable rates give flexibility, and a split loan gives you some of each. Fixed loans can carry break costs and often limit extra repayments, which matters if you plan to pay down debt with bonuses. Offset access is usually tied to the variable portion, as covered in the split loan discussion above.

The next RBA decision is on 8 December, and the RBA says incoming data and its assessment of the outlook and risks will guide its decisions. Nobody can say where rates will go, so choose a structure you can afford under either outcome. If a fixed term is ending soon, see our page on fixed rate expiry.

What to do if repayments are becoming difficult

If repayments are becoming hard, contact your lender early, preferably before you miss a payment. The steps below set out what to do.

1. Contact your lender early, preferably before missing a payment.
2. Tell the hardship team what changed, how long it may last and what you can afford.
3. Know your rights. A lender must give a written outcome on a hardship request within 21 days, and an arrangement won't affect your credit score but appears on your credit report for 12 months. If a request is refused, the lender must give a reason, and you can use its dispute process and then contact the Australian Financial Complaints Authority (AFCA). Ask how any arrangement affects interest and total cost.
4. Check income protection insurance, including cover through super, and ask utility providers about hardship options.
5. Get confidential support at no cost: National Debt Helpline 1800 007 007, Mob Strong Debt Help 1800 808 488 (for Aboriginal and Torres Strait Islander people), or Beyond Blue 1300 22 46 36 (24 hours).

Plan ahead for a smaller bonus, a drop in practice income or a change of firm. High-pressure work can add to money stress, and asking for help early is a sensible professional decision.

Small steps taken early can give you more options later. Call one of our team or book an appointment at a time that works for you, and bring a recent loan statement, payslips or your latest two years of tax returns, and details of your other loans.

This article is general information only and doesn't consider your personal circumstances. All lending, including any LMI waiver, is subject to lender criteria and credit approval. Speak with your accountant about tax.

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