Rates at an 18-Year High: Police Officers Home Loan Guide

Police pay often includes shift penalties and overtime, and a transfer can mean renting out your home, so your loan needs to fit the way the job really works. The RBA lifted the cash rate by 0.25 percentage points to 4.85% on 3 November, the fifth rise this year and the highest in 18 years. 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 first step to try.
• Refinancing can help, but compare total costs, not just rates.
• A cash buffer held against your loan can help you through changes in income.
• If repayments are getting hard, contact your lender early.

What do the rate rises mean for your repayments?

Your repayments rise when your lender passes on a cash rate increase. That happens on variable loans now, and on fixed loans when the fixed term ends. The RBA's five rises this year add up to 1.25 percentage points.

Each lender decides when a change takes effect, so check your emails and statements for the new amount and the start date. The table below is an illustrative example of a 30-year principal and interest loan.

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

If you're paid fortnightly, ask whether you can match your repayments to your pay cycle. Fortnightly repayments may not be available on every loan.

Know your numbers before you call your lender

Before you call, work out your current rate, loan balance, remaining term, the new repayment amount and the date it starts. Add your estimated property value and your loan-to-value ratio (LVR), which is your loan as a percentage of what the property is worth.

If you have a fixed rate, find the expiry date, because that is when your repayments reset. Our page on fixed rate expiry explains what to check.

Separate your base pay from shift penalties, overtime and allowances, because lenders and budgets treat them differently. Also note any transfer, promotion or change in duties coming up, as these can change your income or where you live.

Ask for a rate review, or consider refinancing

Start by asking your current lender for a lower rate, then compare what other lenders offer to see whether switching is worth the cost. Refinancing only pays off when the savings outweigh the fees.

Compare your rate with what lenders offer new customers, then ask yours to match it. Having at least 20% equity and a good credit score can help your case. You can read more on getting a lower interest rate.

If your lender won't move, refinancing is the next option. A broker can compare loans across a panel of lenders, but costs can include discharge, application, valuation, switching and fixed-rate break fees, plus possible stamp duty. Moneysmart has a mortgage switching calculator that shows how long it could take to recover those costs.

With less than 20% equity, you may be charged lenders mortgage insurance (LMI), a premium that protects the lender, not you. Falling property values can shrink your equity and push up your LVR, which can affect pricing and whether LMI applies. You can ask whether part of the LMI on your current loan can be refunded.

APRA requires banks to assess new borrowers at a rate at least 3 percentage points above the loan rate. Non-bank lenders set their own assessment rules.

Restarting a 30-year term can lower your repayments but increase the total interest you pay. Keeping a similar remaining term, or keeping your repayments at today's level, reduces that risk.

Lenders vary in how much shift penalty, overtime and allowance income they count, and how much income history they ask for. Recent payslips make that conversation easier.

Can police officers avoid paying LMI?

Some lenders waive or cover LMI for sworn police officers, depending on the lender and the loan. Lender criteria change often, and a broker can check your eligibility through our page on LMI waivers.

A profession LMI waiver means LMI would normally apply but is waived because of your occupation. Lender-paid LMI means the loan is insured and the lender pays the premium, which is reflected in pricing. Debt-to-income ratio is your total debts divided by your gross income.

These options are for sworn police officers, not unsworn staff.

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, and an offset account is usually linked to the variable part. An offset reduces the balance you are charged interest on while keeping your money accessible.

Money in an offset doesn't earn interest, and loans with offsets can come with higher rates or package fees. Access to redraw depends on your loan terms.

Some borrowers can increase their loan when refinancing and hold the extra in an offset as a cash buffer. This is possible through an equity release loan, and it doesn't suit everyone. The example below is illustrative and uses 6.75% for both figures.

Example at 6.75% over 30 years

While $50,000 sits in a 100% offset, it cancels about $281 a month in interest. That saving falls as you spend the buffer, but the higher repayment stays.

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. Check that the offset is 100%, not partial, and correctly linked to your loan. If the new loan takes your LVR above 80%, LMI may apply, as covered in the LMI section above.

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

A buffer is a safety net, not spending money, and it won't fix repayments that are already unaffordable. Only make extra repayments if your household can afford them.

If a transfer means you move out and rent 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. You generally can't treat another home as your main residence for the same period, so speak with your accountant. Check with your lender and broker before renting out your home, as your loan terms may change. You can read more about investment loans. Paying overtime into the offset rather than your everyday account lets it work against your loan balance.

Tighten the household budget

The quickest budget wins are usually the bills you can renegotiate: subscriptions, insurance, energy and phone plans. Review each one and ask for a new quote.

Credit cards and buy now, pay later can add monthly pressure. Debt consolidation may lower your repayments, but it can stretch the debt over a longer time.

Build your core budget on base pay and treat overtime as extra, because it changes with rosters and duties.

Fixed, variable or split?

A fixed rate gives repayment certainty, a variable rate gives flexibility, and a split gives you some of each. The right mix depends on how much certainty you need and how likely you are to sell or pay the loan down early.

Fixed loans can carry break costs if you leave early, and limits on extra repayments. Variable loans often allow extra repayments, and offset access depends on the loan, but check your loan terms. As covered above, a split loan lets you hold both.

The RBA's next decision is on 8 December. Rather than trying to guess the outcome, choose the structure that suits your budget today. If a transfer could lead to selling during a fixed term, break costs matter more.

What to do if repayments are becoming difficult

If repayments are becoming hard, contact your lender early, ideally before you miss a payment. Lenders deal with hardship requests often, and early contact gives you more options.

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

If your circumstances are unlikely to improve, selling may need to be considered, after speaking with a financial counsellor or getting legal advice.

Plan for injury, extended leave or less overtime, because losing income can hit harder than a rate rise. The job can be demanding, and support for money stress and wellbeing is available when you need it.

Small steps taken early can give you more options later. Book an appointment at a time that suits your roster, and bring a recent loan statement and payslips, or call one of our team at Blue 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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