As interest rates rise, so does the risk of losing your home
With inflation now increasing financial pressure on families, and likely interest rate hikes coming our way, many Aussie families will struggle to meet their home loan repayments. This is a tough place to be for a family.
Research by the University of NSW suggests the proportion of households in financial stress has surged to 42% this year. This is up sharply from less than a third of households who were in financial stress at the start of 2020. Calculations by the fintech company, Digital Finance Analytics, suggest just a 0.5 percent rise in home loan interest rates could push a further 220,000 Australian households into financial difficulties. Crazy! - it really makes me sad to read these forecasts.
While these figures are a bit scary, there are some simple and effective steps you can take today if you’re concerned about your financial position. As always, you need to start to understand where your money comes from (income) and where it goes (expenses). This is easy to do when you have a Spending & Savings Plan ….we don’t really use the dirty ‘B’ for budget word much around here.
Let's get practical
I'm never one to dump a problem on you without some thoughts on a solution. Here's some hot tips to get your head in the game:
Look for costs you can reduce, or better still, do without entirely. That second takeaway coffee at work isn’t really that necessary is it? Do you bring lunch from home or do you buy lunch every day?
Do you really need two cars? Maybe you do, and this isn’t really an option, but think about this: Downsizing to one car in the family is estimated to save between $8,178 for a smaller car to just over $20,000 for a larger SUV each year in related costs . You don't need me to tell you about the price of fuel these days either - Pump #2 robs you blind every time you fill the tank. If you were able to get by with one car then the savings could be re-directed to help pay off your mortgage.
When was the last time you reviewed your home mortgage? You could speak with your favourite mortgage broker to check if you should fix your interest rate or if there are better, cheaper home loans on the market that you can take advantage of. Don’t be shy, good mortgage brokers are absolute financial ninja’s. Call your favourite ninja now – and remember: every dollar of interest you save means you have an extra dollar available to reduce your mortgage.
If interest rates increase, and you can no longer meet your monthly repayments, it’s better to be proactive and speak to your bank or home loan provider ASAP. As soon as you become aware that there may be a problem, get in touch and ask for their help to find a way forward. Don’t bury your head in the sand. Only bad stuff will happen from that – so don’t let the bank sort this problem out for you.
Got credit card or Afterpay debt? There may be some simple steps you can take such as consolidating this into your low-cost home loan to reduce your overall repayments. Use the savings to build a buffer in your home loan account to soften the blow of an interest rate increase.
Extra cash: Honestly, this one's my favourite and I couldn't resist including it! Most of the above was about reducing expenses to free up some cash to meet increased loan costs - but what about just making more money? Nothing helps people get creative more than a little desperation. What would you do if your house was on the line? - that would motivate most people to action. Would you chase up some overtime at work? Would you sell some of your accumulated stuff in the garage - and the garages of your neighbours, friends, family while you're at it? Would you finally pull your finger out and start that side hustle for some extra income? Don't always look to cut back expenses. Take a look around and see how you can create something new get the income you need to meet your lifestyle needs.
Nothing stays the same forever
We’ve had a good run with low interest rates and fantastic property growth over the past couple of years. And we’ve grown accustomed to a general feeling of household wealth because of this. I’d suggest that this run is now coming to an end. Like all things that come to an end, there will be those that have prepared – and there will be those who’ll be caught by surprise. Which one will you be?
 https://www.datocms-assets.com/49357/1626740597-2020-vehicle-running-costs-v2.pdf (RACT Report 2020)
Shaun O'Keefe helps families feel more financially secure. He's found that he can help more people, more effectively when he helps families. As a fee-based financial planner, he works with families just like yours to bring personal values and financial resources in line so that you can keep focussed on the priorities in your life.
The information contained in this article is general in nature only. It is not intended to be a recommendation, offer, advice or invitation to purchase, sell or otherwise deal in securities or other investments. Before making any decision concerning a financial product, you should seek advice from an appropriately qualified professional. We believe that the information contained in this document is accurate. However, we are not specifically licensed to provide tax or legal advice and any information that may relate to you should be confirmed with your tax or legal adviser.