The RBA is dreaming of a tight Christmas

Haven’s tips to keep the Grinch at bay as interest rates rocket.

The message is loud and clear. The Reserve Bank of Australia wants households to tighten their belts to keep a lid on inflation. And to do it they’re making sure we all have less to spend after paying the mortgage.

Rates have jumped from a record low 0.1 per cent in April to 2.85 per cent in November. To put things in perspective, we’ve had more rate rises in the past six months than we’d had in the previous nine years.

And the last time Aussies weathered a rate rise this steep was close to three decades ago, in 1994, when rates jumped 2.75 per cent between June and December to reach 7.5 per cent.

But back then, the average house price in Australian capital cities was well under $200,000.

Now it’s north of $1 million, leaving households much more vulnerable to interest rate fluctuations.

The jump in repayments is already biting, but the RBA is warning of more pain to come. It’s particularly confronting for many homeowners who have only ever seen rate cuts. But there’s no need to panic. There are strategies to claw back a buffer and stay on top of repayments.

Don’t blow it

It’s awkward timing in the rundown to Christmas, but for a host of reasons households need to rein in discretionary spending. Any large purchases that can be postponed, should be.

Banks will look very closely at non-essential spending when assessing loans and refinancing applications, so it will be useful to have a track record of responsible spending, even if you think you can afford to keep spending.

Late last year lenders switched to a serviceability buffer of 3 per cent, up from 2.5 per cent, so you will need to show you have wriggle room in your budget beyond current rates.

Turn on to offsets

If you’re on a variable rate, an offset account will provide better bang for your buck, reducing interest charged on your loan balance, rather than earning a lower interest rate in a savings account. Borrowers should also be across the difference between redraw facilities and offsets. Money in an offset account is always accessible, whereas your bank may have a clause allowing them to change redraw terms without notice. ME Bank highlighted the issue in 2020 when it moved an average of $17,000 from some customers’ redraw accounts to pay down the balance of their home loans. After a furious backlash, the bank reversed the decision.

Shop around

Refinancing is hitting all-time highs, more than doubling pre-pandemic levels as homeowners jump ship for a better deal. And little wonder: rates available in the current market vary widely.

In August alone, more than $18 billion worth of home loans was re-financed. But tough serviceability requirements are going to limit options for some, with price falls hitting equity and the all-important loan-to-value ratio of recent borrowers. Those who find themselves in mortgage prison may not have the option of switching to another lender, but that doesn’t mean they can’t ask for a better deal from their current lender.

That’s where having a broker in your corner can help. Lenders may be persuaded you are serious about exploring other options if you demonstrate you’re across the market – and we are. Give me a call to look at your options. If you haven’t refinanced in the past five years, you are almost certainly paying too much.

Rethink Christmas

Cutting back on spending doesn’t mean you have to cut back on fun. If you gather as an extended family, replace individual gift-giving with a Secret Santa ritual where each person only buys one gift to exchange randomly.

Keep it fun by playing Yankee Santa or White Elephant, where people get allocated a gift, but can choose to swap or steal one from another attendee before they’re unwrapped. Look up the rules and fun variations online, and get organising.

Sweat the small stuff

Cut back on regular treats that can add up – takeaways, coffee and drinks. But also reassess some of your direct debits or recurring expenses. Have you culled your streaming subscriptions lately? Do you need that gym membership now summer is around the corner?

Also, it’s well-known Aussies get stung by loyalty tax if they don’t shop around on insurance or mobile plans. Don’t just let these simply roll over. Set aside a week to go through each one, and look for extras that will save you. Comparison websites make this process easier these days.

Remember supermarkets’ mobile plans often include grocery discounts that can pay for themselves, while other carriers may bundle streaming services. This process can easily save you hundreds each year.

Pay it forward

There are several ways to build a buffer into your home loan. Switching from monthly to fortnightly payments is a simple and painless way to build two extra repayments a year into your schedule. Over the course of a 30-year loan, this can shave more than $100,000 off an $800,000 loan and pay it off years earlier.

If you’re nervous about coming rises, take the initiative and raise repayments yourself. It’ll give you a buffer and a head start on adjusting to a new budget.

Stay in touch

The broker-client relationship is not a one-off: we’re in for the long haul. This is a key time to catch up, particularly if you’re concerned about repayments. There’s an old saying that good news is getting bad news fast, so you can give yourself time to plan and react.

There are lots of options to consider, including refinancing and perhaps splitting your loan between fixed and variable terms. I can help assess your financial situation, look at your goals to help find a package to suit, then advocate for you with lenders. Let’s get on the front foot.