Good Money Conversations

Financial Literacy Month

• April is a good month to do a personal stocktake on how you are going against your own personal financial goals.
• Whether it be for saving for a house, saving for a special holiday or perhaps getting on top of your credit card, consider using a spreadsheet or a personal planner document to review your goals.
• This month, we will talk about inflation because it is on the tips of many market commentators’ tongues.
• Inflation could impact your personal budget so it’s a good time to familiarise yourself with the concepts., especially if you have a home loan.

A look at the economy

• The world has been in a disrupted state for 2 years with the COVID circumstances which is being further accentuated by the Ukrainian situation triggered by Russia. There has also been the consequential economic financial sanctions imposed on Russia by the West. Globally we see experienced uncertainty in labour force markets and supply chain issues which has fuelled inflationary expectations. There are further pressures on inflation due to the commodity and energy crisis precipitated by the Ukrainian situation. Therefore there is a lot of factors colliding and pushing together and so the general economic feeling is that there is going to be ongoing pressures on the global financial situation.
• What this means for the Australian economy is that we have already seen fixed rate home loans increase over the past 4 – 5 months. Remember that fixed rates are priced off the long term expectation of inflation, which has been priced into the 3 and 10 year US bond rate.
• Whereas variable rate home loans are influenced by the RBA deliberations regarding inflationary effects within the Australian economy. That is why the RBA has a range of inflationary targets it manages.
• If in Australia there is a feeling that inflation is on the rise due to the energy supply issues and labour force shortages, the RBA will use an increase in interest rates to curb total aggregate demand (eg this included fuel, commodities and general household goods).
• An example of what the RBA is trying to achieve here is to influence each household in Australia’s expenditure on discretionary items and redirect that money into their mortgage. It could be seen as a penalty for many households who already operate on a tight budget.
• With these global issues and now a the Federal election on the 21 May 2022, there are a number of market commentators in Australia at present who are suggesting that the RBA may decide to wait and see the inflationary effects in the economy. This is suggesting that there may not be a change in the official cash rate, which may delay flows into rising variable interest rates on home loans until possibly August or later.
• The alternative to this commentary is that the RBA retains a very conservative approach to managing inflation and does in fact go ahead with lifting the official cash rate around or before the Federal Election.

Case Study

Average home loan $500,000 – the current variable rate being paid by major lenders is around 2.75% – monthly repayment on a 30 year loan is approximately $ 2041 per month.

If the RBA lifted the official cash rate by 0.25%, your home loan rate could be increased by the banks to 3% per annum. The monthly repayment on a 30 year loan would then be approximately $2108 per month.

For the average family this means a monthly mortgage payment may increased $67 per month. This could mean reducing your takeaway coffees during the working week to 3 or 4 of the days or cancelling a few subscriptions.

Does this mean I should consider fixing my home loan?

If you take a look at fixed rate home loans at present, you will find that many of the banks have already accounted for the global expectations of inflation. In comparison to a variable rate loan, a principal and interest fixed rate home loan for 3 years could already be approximately 1% higher than the current variable rate.

If you have a large home loan on your family home, and want to provide you and your family some certainty over your home loan repayments, you might consider fixing a portion of the loan.

Bearing in mind, doing so means you pay upfront each month for that “insurance” against interest rate rises. This would be more than you would be paying on a variable rate owner occupier home loan. The amount of the extra repayments depends upon the timing and extent of future RBA official cash rate rises. Often, the banks will have conditions on a fixed rate loan that prevents or restricts additional loan repayments. You may not be able to have a mortgage offset account or pay a large lump sum in this scenario.

If you are needing some help to review your home loan, then you should always talk to a reputable lender or licenced mortgage broker. There are also some good websites to look at to compare interest rates, such as Canstar.

#moneymanagement #wealth #goodmoneyconversation #savings

Milan Chetkovich is a licenced finance broker, operating mortgage services business – Essential Financial Services – Finance Broker Licence – 392928. Milan is a Certified Practicing Accountant, and holds an Accounting degree and Economics degree from the University of Western Australia.

Tracey King is an experienced brand, product and marketing senior executive with industry experience in financial services, banking, aged care and retail industries. Tracey holds a Bachelor of Business in Marketing from Edith Cowan University, Perth Western Australia.

The information in this Blog is general and has not taken into account your objectives, financial situation, or needs. It is not personal advice. You need to consider whether this advice is right for you, having regard to your own objectives, financial situation and needs. You may need it is important to check any product information directly from the product provider. Ensure you consider the relevant Product Disclosure Statement (PDS) or other applicable product documentation before making a decision to purchase, Aquire, invest in or apply for a financial or credit product. You may wish to seek financial advice from a suitably qualified adviser or finance broker. The writers of this Blog may receive a fee for referring you to a credit or banking provider.