It’s started. We all seem to be concerned about costs going up. And now interest rates are on the up too.
You know it’s a serious issue when political parties start talking about the cost of living. Especially when it comes just prior to an election.
And as a committee member of the Brisbane Basket Brigade, we are already discussing how families that are normally so generous with food donations will be able to help us.
But is the alarm worthy of worry?
Well, over the last few weeks I have been talking to people who are concerned about the amounts they must pay on their mortgage.
And then it happened. The rate went up and everyone in the finance field got very excited.
You see, this was the first increase in 11 years and many homeowners have never seen interest rates go up so they have no idea what it can mean. Or the stress it can bring.
I remember what was known as Black Wednesday. At the time I was in the UK. The government, in its attempt to protect the pound, raised the base rate by 2% to 12% in one morning which was catastrophic. When news filtered through my work colleagues became white with worry. Then, within an hour the rate was raised further by another 3% to 15% which was beyond catastrophic. Over the next few years, many lost their homes as they struggled to pay their mortgages.
I accept we are not likely to go through a Black Wednesday. Or are we?
Here’s the thing. The media will tell you that if you have a $500,000 mortgage a 0.25% increase will only cost you an extra $65 a month. Finding that in your piggy bank isn’t going to be too taxing.
But I met a loan specialist recently and they told me that within the next 12 months $200Bn (yes, you are reading correctly) in mortgages will move from fixed rates to variable rates. In the next 24 months $500Bn (yep, you are reading right) will move to variable rates.
We also know that our banks are quite greedy. So, what are their chances that they will give you a variable loan rate 0.25% higher than your current fixed rate? Almost none. Experts are saying anyone coming out of a fixed deal are likely to pay 2% more on a variable rate.
To put some numbers to this if someone has a mortgage of $500,000 the interest bill will go up $10,000 a year or $833 per month for every 2% increase. If they have pushed themselves to the limit to buy their home finding an extra $833 in their piggy bank might be a bit of a challenge.
And don’t expect this rate increase to be the last one. Many experts expect this to be just the start.
Will it result a housing price fall or correction? Well, I am not God so cannot tell you. But if it does, we could end up in a situation of where borrowings exceed the value of properties or what is known as negative equity – something that is alien to Australians.
If you happen to be one of those who are concerned what should you do?
- Stop Spending
Our government splashed about so much money that we went bonkers with it. We became spenders.
It’s the reason we have such high inflation.
It may be time to stop spending and looking at what you ‘need’ rather than what you ‘want’.
One of my client’s recently told me that it took a while to understand that buying cars on finance & expensive machinery for his business was more about vanity than the need and that resulted in wasted money.
Live within your means. If you must borrow then the chances are you cannot afford it.
- Pay down other debts first
If you can pay off other more expensive debt first. Credit cards and personal loans are expensive – try to cut them down as fast as possible before they get out of hand.
- Consider refinancing
If you believe you can get a better rate, think about refinancing but be careful of those dreaded bank fees!
- Consider Fixing
Although fixed rates are increasing if you feel that variable rates make payments unpredictable, consider fixing your current variable rate.
It may not be the best rate but at least you know what your payment will be an not worry about what it could be.
If you are currently on a fixed rate speak to your bank or broker and ask about your options.