Predictions on interest rates have lately become reminiscent of a daytime soap storyline. Will rates stay the same? Will they go down this month? Next month? Will they, God forbid, go back up again? Borrowers are on tenterhooks, waiting for some definite news, like a viewer waiting for an ad break so they can rush to the toilet.
Needing an economic chill-pill
While everyone is whingeing that rates are too high and the cost of living is getting way out of control, I think it’s time to get some perspective. Interest rates were at pretty low levels before all this fuss began about interest rates and the cost of living. I think the majority of consumers just got complacent. It was only that our false sense of security got such a violent jolt with interest rate rises and fuel price increases that the economy has suddenly caught the interest of people who normally would be preoccupied with voting for reality television shows or the lives of their favourite soapie stars. The economy is suddenly newsworthy.
I was recently talking to a young friend of mine who works a casual job. Since retail has taken a battering, we were talking about the importance of saving money. I said it was important to have something aside ‘just in case’. She agreed, but said she would wait until she was earning more money until she started saving.
Still stuck in a rut
The fundamental difference between people who survive financial setbacks and people who are destroyed by them is their attitude to saving. People who live beyond their means on a regular basis, and depend on an increase in income to cover the bills, or to start saving, are the first to feel the pain when hard times set in. Had rates gone above 8% instead of staying at 7.25%, consumer complacency might have been broken. Unfortunately, nothing has happened to deeply shake consumers out of their spending stupor.
When my partner and I borrowed a small amount for our home, one of his colleagues laughed and asked why we didn’t borrow twice that much. He thought we were crazy. Since the last few interest rate rises, we’ve been comfortably making extra payments. Had we borrowed twice that amount, and bought a much nicer home, we would have required both our incomes to cover the mortgage repayment. Living within your means has benefits, in that you don’t have the added stress of not making your repayments.
If you’re thinking that it’s all too hard, think again. There are a few simple things you can do to make saving easier.
Cash is king
First of all, revert to cash. Withdraw the necessary funds from your account as cash, and pay all bills and purchases in cash. This way, you have a concrete amount of money to spend, and you’re less likely to go overboard on unnecessary items when you know you only have a $20 note in your wallet separating you from being broke. By taking what you need out as a lump sum of several hundred dollars, you also save on those extra bank fees. While we’re on the subject of bank fees, have a look at your fee schedule if you haven’t already. I have an account with a bank which charges me $4 a month interest. As I don’t use that account, and don’t like paying the $4 a month, I just leave it open and leave $0.46 cents in it. They can’t take $4 if there isn’t $4 in there. Consider changing banks if they are charging you an arm and a leg to access your money. You are a powerful consumer. Nothing says “I am dissatisfied with your service” better than walking into a busy bank and insisting they cancel your account.
Leave what you don’t need
While we’re on the subject of withdrawing money, consider leaving even $20 in your card account and then leaving your card at home. If you’re dealing in cash, you don’t need it, and if you can’t get that $20 in a hurry, it’s more likely to sit there until next week.
Get the boss to do some legwork
Consider getting your employer to put part of your wage into another account. Again, it’s not rocket science, but it’s a tip included in many finance self help books for a reason. This tip is pure gold. You won’t notice that little amount missing from your pay packet, but after a few months, you’ll have a nice little stash of cash sitting there, without you realising.
Avoid shopping like the plague
If you find it hard to restrain yourself when shopping, then don’t go shopping. Stores are set up in such away that they entice you to part with your money. If you don’t want to give a store money in exchange for crap you don’t need, leave your wallet at home. Plan your shopping outings, and keep to a list when shopping for groceries. Make sure you’re not hungry when you shop, and if at all possible, make shopping an adults only affair. Nothing increases your grocery bill like shopping with children or teenagers.
Empty your wallet every day into a jar. Even if you just put the small change in there, in a few weeks you’ll have a tangible amount of small change. Saving something, no matter how small, on a regular basis is the key to getting ahead.
Keep the faith
When it comes to interest rates, I’m not really that worried. Predicting interest rate movement is a bit like predicting the weather. You know generally that it’s going to be warm in summer and cool in winter, but as for what the weather will be like on a specific day, well, we all know meteorologists are renowned for being inaccurate. Now that the general mood is that rates will go down, it’s only a matter of waiting for the inevitable reprieve.
The Great Rate Debate
Each year hundreds of thousands of homebuyers nationwide debate the merits of fixed versus variable rates when it comes to getting their home loan.
The current global market volatility and recent interest rate hikes have heightened interest in the debate leading to even more rate scrutiny.
Homebuyers are now more aware that loan finance decisions should be thoroughly explored. As a result, they are seeking the advice of home loan specialists who can help prioritise goals, examine financial circumstances, assess need for security and, ultimately, decide which side to take in the ‘Great Rate Debate’.
Commonwealth Bank’s Head of Retail Products, Michael Cant, takes the role of adjudicator to mediate the case between fixed and variable rates.
What is the difference between fixed and variable?
A fixed rate home loan offers a range of terms at a set interest rate that is applicable for the agreed term of the loan. At the end of the fixed, borrowers can either fix their rate again or switch to a variable interest rate.
A variable rate home loan can rise and fall depending on the official cash rate and the costs of funding being experienced by mortgage providers.
Borrowers can also choose to split their home loan by choosing to have some of their loan in a fixed term and interest rate and the remainder on a variable interest rate. This option provides a balance between the certainty of repayment amounts and flexibility.
Why choose a fixed rate loan
If you need to follow a carefully thought through budget to manage your cash flow and are looking for certainty in repayment amounts, a fixed rate home loan would be the preferred option. Homebuyers with a number of financial responsibilities who are working to a strict budget can feel secure knowing that their repayments will be consistent and that their interest rate is protected from further increases during the term of the loan.
Variable loan is the way to go
One of the key advantages of a variable loan is that it provides flexibility. Should you find that you have surplus cash each month you can increase the repayments to pay the loan off faster. Or if you receive a bonus this can be paid into the variable loan which can potentially save substantial interest payments in the longer term. These overpayments into the loan can also be redrawn should you find the need for the funds elsewhere.
Overpayments on both loans
Fixed rate loans on the other hand are a little more restrictive in terms of overpaying or redrawing from the loan. For example, a Commonwealth Bank fixed rate allows overpayments of up to $10,000 per annum without any interest adjustment payable. Any amount over $10,000 may attract a fee to adjust the interest payments. Unlike a variable loan, once these funds are paid into the loan they cannot be redrawn.
As fixed rate loans are for a defined period of time they are less flexible should you want to repay the loan early. As a result of the fixed nature of the loan, you may be liable for break costs if you repay it before the end of the fixed period.
With this in mind, if you are looking for the security of a fixed rate, but would also like to keep your options open in the event of an improved financial position; ensure that you consider carefully the length of time you fix your loan.
You can do both
You can also safeguard against unpredictable market conditions by taking out a Split Rate Loan. This option allows you to ‘hedge your bets’ by nominating how much of your loan is fixed and how much is variable.
Recent increases in interest rates have many homebuyers believing they should lock in a fixed interest rate. While this would work to safeguard against future increases, the key is not to make a rushed decision. There is no guarantee of more rate increases, such is the volatile nature of the market, therefore many home loan buyers can choose the split option to have both certainties of future loan payments and an element of flexibility with a portion of the loan on a variable rate.
Another reason why you should select ‘variable’
If you are in a position of complete financial flexibility, a variable rate home loan could be the best choice for you. Choosing a variable interest rate means you directly benefit when market rates drop. Create a budget to ensure you are able to make your repayments if rates rise and enjoy the periods when rates are lower.
Before you make the final decision
It is most important that you properly assess your situation and options before choosing your home loan. You will be able to make your repayments with ease if you have a well informed loan strategy that suits your individual needs.