Building a Granny Flat means to insulate against rate rise

March 8, 2023

An article published in the Australian Financial Review (AFR) on Sunday 5 March identified a number of ways Australian households are softening the impact of more expensive rates, including building a Granny Flat.

The story covered the situation of Peta Xanthoudakis, who has spent two and half decades of her life building up a property portfolio of three houses and a commercial property. Xanthoudakis is currently facing challenges in servicing her mortgage debts, which exceed $1 million. As a result, she is exploring options to renegotiate her loans and is even contemplating fixed rates. This comes at a time when thousands of borrowers are apprehensive about significant increases in mortgage costs as their fixed terms come to an end.

a 58 year old woman having fun taking portraits in the mountains of north carolina.

According to analysis by Roy Morgan, approximately 25 percent or nearly one in four borrowers are considered to be "at risk" of mortgage stress. This means that they spend between 25 percent and 45 percent of their after-tax household income on their home loan.

With the 10th consecutive rate rise just announced by the RBA this week, it’s now well written about, that a significant number of borrowers who opted for fixed rates two years ago are now approaching a fixed rate cliff. It’s estimated that approximately $400 billion worth of fixed rate loans are set to expire this year, and Australians with fixed-rate loans are likely to experience a painful adjustment, as mortgage debt will be re-priced at much higher rates.

To illustrate the high increase in interest costs, Homebuyers who secured an average 30-year, two-year fixed-rate home loan of $540,000 in April 2021 at a rate of 1.98 percent will see an increase in their payments. When the loan reverts to the standard variable rate next month, they will pay approximately $1000 more, or around $3000 in total.

For families and investors who have spent a significant time building up an investment portfolio, they will be looking at clever moves to soften the impacts. The article in the AFR listed the following suggestions:

Contact your lender and negotiate for a lower rate. It is more cost-effective for lenders to retain existing borrowers. Lenders are especially eager to retain customers who have established equity and a solid repayment record.

Borrowers could opt to extend the term of their loan, which would lower their monthly repayments. Alternatively, they could switch to temporary interest-only repayments.

Consolidating and reducing other non-mortgage debt, such as credit card or car loan repayments can simplify debt management by combining multiple debts into a single payment.

Households are reviewing and cutting down discretionary spending such as eating out, subscription services

Exploring options to increase income is another option. This could involve asking for a pay rise, renting out a portion of a property, or constructing a granny flat to generate additional rental income.

If you would like to explore whether a Granny Flat could help your financial situation, Cubitt’s offer a completely free feasibility study and quote based on detailed onsite assessments. They operate across the East coast of NSW from Taree to Moruya, west into the highlands and Blue Mountains and cover all of the ACT. Visit a showroom or call 1300 721 150.

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About Kate Cubitt

Kate is Managing Director of Cubitt's. She is an experienced company director, avid investor and keen to share the financial insight she's gained being a female leader in the building industry.