Does it feel like it is costing more and more every week, just to get by? Most people would likely answer yes when asked this question, and with inflation being a hot topic at the moment (and rightfully so with it being at a 30 year record high of 5.9%) you would need to be closing your eyes and waving your card to pay at the supermarket checkout and service station to not be feeling the effects.
Simply put, inflation is a measure of the change in cost to buy selected household goods and services. Essentially it indicates whether you are getting more or less for every dollar you spend on those items.
It is no secret that the cost of living is skyrocketing faster than anyone can keep up, it feels like everything we buy is getting more and more expensive by the week, putting strain on household budgets. Many experts believe that we are yet to see inflation peak too, so it looks like it may not be getting any easier anytime soon, with some experts even suggesting that we won’t see inflation return to its target point of 2% within the next 10 years. This is worrying, and if it turns out to be a reality then there could be a very bumpy road ahead for a lot of households.
With Wednesdays Official Cash Rate announcement seeing a rise in the OCR to 1.0% (0.25% up from 0.75% which was widely expected) and an expectation of further increases in the OCR to come in the future, it seems we could see mortgages interests continue on their upward trajectory.
The majority of current residential mortgage lending on fixed interest rates are due to come off their fixed terms over the next 12 months, from record low interest rates to a climate that could see households experience substantial increases in mortgage repayments putting further strain onto already stretched budgets. When thinking about writing this blog, I tried to think about the answer I would give to my friends or a family member if asked about this topic, and it really boils down to one key sentence; you need to give this some REALLY serious thought and consider all of your options.
As a Financial Adviser, naturally we keep our fingers on the pulse with what’s happening in the economy, the financial world and political policy among a number of other key indicators which we use to give the advice we give. And if I’m honest, lately I can’t help but think about the strain that could be coming to household budgets in the near future.
There are forecasts out there from respected economists indicating that next February we could see the one year fixed rate at 4.75%. Now, if you look at interest rates over the last 10 years, that’s still a good interest rate. Sure, it’s not the 2.5-3% that people have become used to over the last year or so, but they’re nowhere near as high as some of the interest rates of the past. It’s when you start looking at real examples and thinking about how that might affect your household that you start to see why I would be saying to really give it some thought. If you work on lets say a $300,000 mortgage over a 30 year term that’s currently fixed at 2.5%, the repayments would be around $275 a week. If you were to refix at 3.85% for another 12 months today (which is a going rate with some of the big banks if you have 20% equity), your repayments could be around $324 per week ($50 a week more). You might be thinking $50 a week isn’t much, we could handle that, but if rates were to continue to rise at the same rate they have over the last few months, in another 12 months you could be refixing at 5.2% meaning your repayments could be around $380 a week ($100 a week more than what you’re paying currently). Now sure, you will have paid off some principal over that time as well, but if you do the actual sums, you’ll see why I have kept the borrowing amount the same for the sake of keeping the example easy to follow. Of course, the lenders work everything in a way that you should be able to experience this kind of scenario and not be struggling to live, but, when you pair this with all the other cost of living increases that we are currently experiencing, and consider that inflation is still on an upward trend, it’s not unrealistic to say that in this scenario it could cost you $200 a week more just to get by in the near future than what it currently does.
There probably hasn’t been a more crucial time to get some good advice if you have a mortgage, and to look at all of your options for lending. A Mortgage Advisor can do both of those things by giving you personalised financial advice that is specific to you, and by shopping around the different lenders to make sure you get the best deal. I know that this blog is not the most inspiring reading, and it comes across as a bit doom and gloom, but if my friend or family member I spoke about earlier came and spoke to me or another Mortgage Advisor and got some good advice that saw them in a better position to ride out a financial storm that might be brewing on the horizon, then it’s a story worth telling.
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