Unless you’ve been living under a rock for the past few months, you’ll have heard about rising interest rates and experienced the very real impact of the increasing cost of living.
But why is it happening? And what can you do to manage the impact on your day-to-day finances? ‘
Shane West, Director and Financial Advisor at Fennell West, says that understanding what’s happening – rather than relying on tabloid headlines and short, sensationalised news segments – is vitally important to help achieve perspective and reduce any anxiety or concerns.
“The guidance from the RBA suggests that inflation is higher than it should be, and we all can feel that with the cost of living.
“The way to fight inflation is to slow spending, and the way they slow spending is to lift rates and take money away from your cash flow, preventing you from having that extra money to spend.
“The idea is that over time, the cost of living will fall, and inflation will return to a reasonable level, which in Australia is about three per cent.”
Taking Control of your mortgage before it takes control of you
The RBA is now working to control that inflation, and the day-to-day reality for every mortgage holder is an increase in variable mortgage payments.
However, even though interest rates are increasing, that doesn’t mean you can’t still get an attractive rate on your loan – and Shane believes that now is the perfect time to review your mortgage.
“There are still some good variable rates out there,” he says. “But they’re offered to new customers, rather than existing ones.
“That tells us that we need to start looking after our own finances, reviewing our mortgage rate and comparing it with what’s on offer elsewhere.”
When interest rates start to increase, the question of fixed or variable mortgages always crops up. And while a fixed rate mortgage does give you certainty, Shane says that you need to be cautious about fixing and don’t just take the guidance from the bank, analyse it your self or speak to your adviser or broker about what you may be locking in for.
“The prospect of fixing it at the moment probably isn’t as attractive as it was during Covid, when fixed rates were actually lower than the variable,” he says.
Are the interest rate rises working for you? And what should we do until they do?
So, what’s on the horizon? More rises and increasing cost of living, or are the RBA’s rate rises beginning to redress the balance?
Shane says that while the early indicators suggest it is, we won’t know for certain until the next round of data is published.
In the meantime, Shane says it’s important to critically analyse the advice you’re receiving.
“If your bank is telling you to fix, just be aware of where that leaves them. They’re just interested in keeping you as a customer, and the best way they can do that is by locking you in.
“Fixing could be the right thing to do, but take impartial advice before doing so.”
As far as your day-to-day cash flow is concerned, variable mortgage increases can make a major dent, so Shane advises being smart with any tax refund you get, reviewing your bank statements for incidental expenses you may have forgotten about, and getting into the habit of paying that little bit more off your variable home loan to get used to what might come.
“I’m going to sound like Captain Boring here, but if you get a tax refund, think about using half of that refund to pay down your mortgage,” he says.
“Work out what a rate rise of two per cent would mean for your monthly repayments, and start paying the extra now so if and when it does happen, you’re ready for it.
“Finally, go through your bank statements and make sure you know what every debit is, you’re using what you’re paying for, and you’ve got a good deal.
“See if there is a better rate available for electricity, and have a look at those things you’re maybe subscribing to but not using.
“While $15 or so per month may not make that much difference to you each week, if you’re not using that streaming service, then cancel it – it all adds up in the end!”
If you’d like help reviewing your mortgage to find out if you can get a better deal, talk to the team at Fennell West. They love nothing more than helping you get the most out of your hard-earned cash.
