The economy in Australia is more complex today than in any other time in history. There are so many different sectors impacting our growth, and it is affecting all of us differently.
Many would have heard of our “two speed” economy. Essentially the mining and resources boom has kept Australia out of the economic doldrums, and in the Northern Territory we have enjoyed some good times over the past decade or so. That is great for those employed in the mining industry, but for many Territorians who aren’t, there seems to be a real gulf between the haves and the have not’s.
For many people in the Territory who are struggling to make ends meet, the only real benefit that they have had over the past five years or so is the enormous growth in property values that we have seen. That said if it is your intention to stay in Darwin or Alice Springs, even if your property has doubled in value, the next property you have moved to will have gone up as well. For the people who have purchased in the past 12 months and have large mortgages I strongly suggest you take stock of your position right now.
The reason is that while the average family may just be getting by right now, the mining boom is driving up inflation, employment is very low nationally, and so all the signs are there for the Reserve Bank to start to look at raising interest rates again. Unfortunately for Australian mortgage holders, it seems that the only mechanism that the Reserve Bank has to curb inflation is to raise residential and commercial interest rates.
Our economy got through the GFC relatively unscathed, if you look at interest rates globally, you will see that Australian interest rates are quite high comparatively. Also our dollar is so strong it is hindering our exports. On one hand that is an excellent indicator that our economy is strong, the bad news is that only a few industries have really been going well.
So, if the Reserve Bank does decide to start raising rates, it will be harming an awful lot of average Australians in the process. Already we are seeing mortgage stress nationally, I have a feeling things are going to get a lot worse for people starting to struggle.
Right now, the Standard Variable interest rate in Australia is around 7.8 percent. Most people should have a discounted interest rate of around 7.2 percent or lower, if you’re not, speak to your broker or lender. There are several economists at the moment saying that by the end of 2012 we may be paying as much as 9.3 percent. That is going to put a hell of a strain on most Australians. It seems a huge jump to me, but even if it doesn’t get that high, many commentators predict rates will rise. I strongly urge every person that has a mortgage to start preparing for a rate rise.
For example, if you have a mortgage of $400,000 at 7.2 percent over 25 years then your minimum monthly repayment is around $2860. If rates go to 9% over the next 18 months you could be paying around $3330.00 per month, that’s an increase of around $470 per month. How is that going to affect your lifestyle? I can tell you that our cost of living will more than likely continue to rise over the same period.
So in light of this I urge you to act now, look at your budget and your options and speak to your broker, or your lender over the next few weeks.
I have some tips for people who think that they will be impacted by interest rates climbing over the next 18 months.
Reduce your house hold debt
Before these rate rises take hold, either pay off any credit card debt that you may have, or speak to a broker about consolidating these debts. If you have car loans or personal loans look at ways of reducing them or again consolidating these into your mortgage. Make sure you get an understanding of how you will be affected if you do consolidate. If you do this and just pay the minimum repayment you could pay thousands of dollars more in interest. You have to get the balance right.
Look at fixing some or all of your mortgage
Fixed rates are stable right now, it may be a good time to look at how fixing could affect you, but please consider everything. I saw a lot of people who fixed their rates just prior to the GFC, they couldn’t get out of these fixed rate loans and if they did they had to pay huge penalties to do so. If you are uncertain of where you will be in the next three to five years, I don’t recommend that you fix, but if you can fix for three to five years at 7.5% and it means you can avoid mortgage stress in the future it may make sense to do so.
Do a budget
Write down exactly where your money goes, and see how much is left over if you had to find another $100 per week to pay into your mortgage. You will see where you are potentially wasting money, and you will also see whether you can afford to hold your property if rates do go higher.
Understand your current mortgage
Do you use all of the features of your current loan? Many people go into a mortgage with the intention of paying it off as early as possible, but the realities in life prohibit them from doing so. Many loans have options and features designed to help you clear the debt quickly. However most people don’t use all of the options that their mortgage has to offer. You may be able to stay with the same lender but reduce your interest rate by changing loan products to a more basic product.
Don’t wait until you start to feel the pinch, banks will not be very helpful if you go to them after you miss a payment or two, speak to a good mortgage broker now, or speak to your lender and ensure you are in good shape to tackle any challenges our unique economy may throw your way.
– 28 June 2011
Dick Grant is a successful Aussie Mortgage Broker, who is fully accredited by the Mortgage & Finance Association of Australia.