If you are a teacher with a home loan, the latest rate rise probably has you checking your budget. Permanent teachers have steady pay, but contract and casual relief teachers can face gaps, and a term break is a natural time to review your loan. 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
- Repayments have risen, so check your new amount and when it starts.
- Asking your lender for a lower rate is the quickest first step.
- Refinancing can help, but compare total costs, not just rates.
- A cash buffer in an offset account (a linked account that cuts the interest you pay) can carry you through income changes.
- If repayments are hard, contact your lender early.
What do the rate rises mean for your repayments?
When the cash rate rises, repayments on variable loans usually rise too, and fixed loans feel the change when the fixed term ends. The RBA's latest move was the fifth rise this year, 1.25 percentage points in total, and it took the cash rate to its highest level since late 2008.
Your lender decides when a change takes effect on your loan. Watch for lender emails and statements so you know your new repayment amount and its start date.
Example: $600,000 loan, rate rises from 5.50% to 6.75%
Item Illustrative detail Loan amount $600,000 Loan type and term Principal and interest, 30 years Rate change 5.50% to 6.75% Extra repayment About $485 a month This is an illustrative example only. In a scenario like this, a teacher paid fortnightly could set repayments to leave the account just after pay lands. That spreads the extra cost, which is roughly $224 a fortnight, across pay days instead of hitting at once.
Know your numbers before you call your lender
Before you call, gather your current rate, loan balance and remaining term. Add your estimated property value, which gives you your loan to value ratio (LVR), the loan as a percentage of the property's value. Also note any fixed-rate expiry date, and your new repayment amount and start date.
As a teacher, add your employment type: permanent, fixed-term contract or casual relief. Note any contract end date and any salary packaging you use, because lenders may ask about both.
A Loan Health Check can pull these figures together if you are not sure where to find them. If a fixed rate expiry is coming, put that date at the top of your list.
Ask for a rate review, or consider refinancing
The quickest first step is to compare your rate with what your lender offers new customers, then ask for a lower one. Having at least 20% equity and a good credit score may help your case. Our page on getting a lower interest rate covers how to approach that call.
If your lender won't move, refinancing means switching to a new loan, often with a different lender. A broker can compare options across a panel of lenders, which is how we work on any mortgage for teachers. You can also read about refinancing for teachers in more detail.
Refinancing can have costs, so compare them against the savings before you switch.
Lenders assess whether you can afford repayments using their own rules, so the same loan can be treated differently by different lenders.
Falling property values can reduce your equity and change your LVR. Less than 20% equity may trigger lenders mortgage insurance (LMI), which protects the lender, not you, if a loan goes wrong.
Be careful about restarting a 30-year term. A longer term lowers repayments but can increase the total interest you pay. Keeping a similar remaining term, or keeping your repayments the same, avoids that.
Lenders may vary in how they assess fixed-term contract and casual relief income, and in how much history they ask for.
Can teachers avoid paying LMI?
A broker can check whether any lender offers an LMI waiver for your profession, and on what conditions. See our page on LMI waivers for teachers for more.
Want a second look at your loan?
Have your repayments, rate and structure reviewed by a broker who works with teachers.
Structure your loan: splits, offsets and equity release
A split loan puts part of your debt on a fixed rate and part on a variable rate, so you get some certainty and some flexibility. An offset account is usually linked to the variable portion. It reduces the balance you are charged interest on while keeping your money accessible.
Money in an offset doesn't earn interest, and offset loans can come with higher rates or package fees. Access to redraw, which lets you take back extra repayments, depends on your loan terms.
Some borrowers may be able to increase their loan when refinancing and hold the extra in an offset as a cash buffer. This is an equity release, and it adds debt. Here is an illustration.
Example at 6.75% over 30 years
Item Before (6.75%) After (6.75%) Loan amount $600,000 $650,000 Minimum monthly repayment About $3,892 About $4,216 The higher loan adds about $324 a month. While $50,000 sits in a 100% offset, it cancels about $281 a month in interest. That leaves the household about $43 a month worse off while the buffer is untouched, and the saving shrinks as the buffer is spent. This is illustrative only, and it only works if the household can carry the larger repayment.
If you explore this, check three things:
- The lender will assess 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 extra borrowing takes your LVR above 80%, LMI may apply, as covered in the LMI section above. Our page on equity release loans explains the process.
Interest deductibility depends on how borrowed money is used. Speak with your accountant before borrowing for this purpose.
A buffer is a safety net, not spending money, and it won't fix repayments that are already unaffordable. Make extra repayments only if the household can afford them. For teachers, a buffer can help casual relief teachers through school holidays and contract teachers between contracts.
If you move for a regional or interstate role and rent out your home, the ATO's 6-year rule may let you keep treating it as your main residence for capital gains tax for a limited time. The rule has conditions, including that the property was your main residence before you moved out and that you don't claim another property as your main residence over the same period. Speak with an accountant or the ATO before you decide.
Tighten the household budget
The quickest budget wins usually sit in subscriptions, insurance, energy and phone plans, so review each one. A few phone calls can offset part of a rate rise.
Credit cards and buy now, pay later can add monthly pressure. Debt consolidation may lower repayments but stretch the debt out, so the total cost can rise.
Casual relief teachers should budget for school holidays, when they usually don't get paid. Salary packaging options vary by employer, so check with payroll.
Fixed, variable or split?
A fixed rate gives repayment certainty, while a variable rate gives flexibility. Fixed loans can carry break costs if you leave early, and may limit extra repayments. Variable loans often come with offset access, which is what makes the split structure described above appealing.
The next RBA decision is on 8 December. The RBA says incoming data and its assessment of the outlook and risks will guide its decisions, and nobody can say with certainty where rates will go. If you want to compare structures, our home loans for teachers page is a good starting point.
What to do if repayments are becoming difficult
If repayments are getting hard, contact your lender early, preferably before you miss a payment. These steps help:
- Contact your lender early, preferably before missing a payment.
- Tell the hardship team what changed, how long it may last and what you can afford.
- Ask how any arrangement affects interest, total cost and your credit report, and ask what you can do if a request is refused.
- Check income protection insurance, including cover through super, and ask utility providers about hardship options.
- Get no-cost, confidential help from the National Debt Helpline on 1800 007 007.
If circumstances are unlikely to improve, selling may need to be considered, after speaking with a financial counsellor or getting legal advice.
Teachers should also plan for a contract not being renewed, less relief work or extended leave.
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, including during school holidays, and bring a recent loan statement, payslips and any current contract.
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.
Frequently Asked Questions
Can contract or casual relief teachers refinance?
It is possible, but lenders may vary in how they treat contract and casual income and how much history they ask for. A broker can help you understand your options.
How should casual relief teachers budget for school holidays?
Build a cash buffer from term-time pay, because casual workers usually don't get paid holidays. Holding that buffer in an offset account keeps it accessible while reducing the interest charged.
How often should I review my home loan?
At least once a year. Review it again whenever rates change, a fixed term ends or your income changes.
