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

ADF members have options such as DHOAS that other borrowers do not, so any loan change needs checking against your service conditions. 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 what your new repayment will be and when 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 an offset account (explained below) as a cash buffer, if it suits you.
• Contact your lender early if repayments are getting hard.

What the rate rises mean for your repayments

A higher cash rate usually means higher repayments on a variable rate loan, and the size of the change depends on your balance, loan term and lender. The November rise is the fifth this year, adding up to 1.25 percentage points in total. The cash rate is now at its highest level in about 18 years.

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

These figures are illustrative only. Variable loans change now, while fixed loans change when the fixed term ends. Your lender decides when a change takes effect, so check the date on your notice.

The picture is not the same for every household, so it helps to look at your own numbers.

If you have a DHOAS loan, DHOAS pays eligible current and former Permanent and Reserve members a monthly subsidy on the interest of that loan. The amount depends on your tier and loan balance, up to the subsidised loan limit. The DHOAS determination sets a median interest rate and average house price for the calculation, so the amount can change over time. Check your current subsidy with DVA on 1300 434 627.

Know your numbers before you call your lender

Before you call, collect the figures your lender will ask about, because a clear picture speeds up every conversation. Your LVR (loan-to-value ratio) is your loan balance as a percentage of your property's value.

• Your current interest rate and loan balance
• Your remaining loan term
• Your estimated property value and LVR
• Any fixed rate expiry date (our fixed rate expiry calculator shows what happens next)
• Your new repayment amount and the date it starts

As an ADF member, also gather these:

• Your DHOAS tier and current monthly subsidy
• Your subsidised loan limit and the date your subsidy started
• Your upcoming posting dates
• Any housing assistance you receive

Ask for a rate review, or consider refinancing

The simplest 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 can help when negotiating. Our guide to getting a lower interest rate covers how to approach that call.

If your lender won't move, refinancing may be worth comparing. A broker can compare options across a panel of lenders, but switching has costs. These can include discharge, application, valuation and switching fees, fixed rate break fees, and possible stamp duty. Moneysmart has a mortgage switching calculator, at no cost, that shows how long it could take to recover those costs.

APRA says banks and other APRA-regulated lenders generally assess repayments at a rate at least 3 percentage points above the loan rate. Non-bank lenders set their own assessment rules, and lenders also treat income differently, so one lender may approve what another declines.

Falling property values can reduce your equity and push up your LVR, which can affect pricing and LMI. LMI (lenders mortgage insurance) is a one-off cost that may apply when you borrow with less than 20% equity. You can ask whether part of the LMI on your current loan can be refunded.

Be careful about restarting a 30-year term. A longer term lowers repayments but can increase total interest, so consider keeping a similar remaining term or keeping your repayments the same.

If you have a DHOAS loan, you can ask your DHOAS provider for a rate review. The subsidy is paid into a DHOAS home loan with one of three providers: Australian Military Bank, Defence Bank or NAB. Check with DVA how any refinance, loan increase or change of provider would affect your subsidy before you apply, and count any lost subsidy when you compare total cost.

The loan limits in place when your DHOAS subsidy starts apply to that loan. If you stop and restart DHOAS, the limits current at the restart apply instead.

Can ADF members avoid paying LMI?

Some lenders have policies that may reduce or remove LMI for certain professions, but criteria differ and change often. A broker can check whether you are eligible. Our page on LMI waivers for ADF members has more detail.

Before choosing a loan, check how any LMI saving affects your DHOAS subsidy, and check with DVA first.

Structure your loan: splits, offsets and equity release

A split loan divides your debt into a fixed part and a variable part, which balances repayment certainty with 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. Offset loans can come with higher rates or package fees, and access to redraw 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 a form of equity release, and it adds debt. The example below is illustrative.

Example at 6.75% over 30 years

The interest saving falls as you spend the buffer, while the higher repayment stays. Before going ahead, check these points:

• 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%, see the LMI section above.

Interest deductibility depends on how borrowed money is used. The ATO gives an example where interest wasn't deductible on borrowed funds left in savings for private use. Speak with your accountant before you borrow.

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.

As an ADF member, check with DVA whether extra borrowing would be eligible for the subsidy, because DHOAS has conditions on loan purpose. Also ask how offset balances or extra repayments interact with the subsidy, which is based on your loan balance.

If you're posted away 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 up to 6 years. Members not living in their own home may also be eligible for Rent Allowance under Defence conditions, as noted by Defence Housing Australia.

Tighten the household budget

Reviewing your regular bills is the quickest way to free up monthly cash. Check subscriptions, insurance, energy and phone plans, and compare each against what you actually use.

Credit cards and buy now, pay later can add monthly pressure. Consolidating debts may lower your repayments, but it can stretch the debt out over a longer time. Our debt consolidation page explains the trade-offs.

Build your budget on base pay, and treat deployment or field allowances as temporary.

Fixed, variable or split?

Fixed rates give repayment certainty, variable rates give flexibility, and a split gives you some of each. Fixed loans can carry break costs and limits on extra repayments. Variable loans usually allow extra repayments and offset access.

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. Nobody can say where rates will go, so choose the structure that fits your budget.

For ADF members, break costs matter if a posting may lead to selling the home during a fixed term.

What to do if repayments are becoming difficult

If repayments are getting hard, contact your lender early, ideally before you miss a payment.

1. Contact your lender early and ask for the hardship team.
2. Tell them 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. An arrangement won't affect your credit score, but it appears on your credit report for 12 months.
4. If a request is refused, the lender must give a reason. You can use its dispute process, then contact the Australian Financial Complaints Authority (AFCA). Ask how any arrangement affects interest and total cost.
5. Check income protection insurance, including cover through super, and ask utility providers about hardship options.
6. Get confidential help 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).

If you receive DHOAS, contact DVA if your circumstances change. A hardship arrangement, sale or move out of the home may affect your subsidy. It also pays to plan ahead for your transition out of the ADF.

Frequently asked questions

Can I refinance and keep my DHOAS subsidy?

The subsidy is paid into a DHOAS loan with one of three providers. Check with DVA before you apply.

What happens to my home loan if I'm posted and rent out my home?

Check your loan terms with your lender and ask DVA how moving out affects your DHOAS subsidy before you rent the home out. The ATO's 6-year rule and Rent Allowance may also apply, as covered in the structuring section above. Speak with your accountant about tax.

How often should I review my home loan?

Review it at least once a year. Review it again whenever rates change, a fixed term ends or your income changes.

Small steps taken early can give you more options later. Book an appointment at a time that works for you, by phone or video if you're posted elsewhere, and bring a recent loan statement, payslips and your DHOAS subsidy details.

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. DHOAS eligibility and entitlements are confirmed by DVA.

Frequently Asked Questions