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As predicted, this week our friends at the Reserve Bank of Australia decided to hit pause on interest rate hikes which means many of us (including myself!) could breathe a temporary sigh of relief.
For the majority of borrowers, this was a very welcome break. However, those who might be feeling a little smug because you were smart enough to lock in an attractive fixed rate also need to plan for what happens when that rate eventually expires.
Do I believe the RBA is going to extend us the grace of another rate freeze? Sadly, no.Credit: Dionne Gain
More than one million Australian households are about to experience a relatively rude shock as they start to fall off the fixed-rate interest cliff in the coming months. The RBA is expecting more than 880,000 fixed-rate mortgages to expire this year and a further 450,000 next year. While keeping our heads in the sand about this may feel more comfortable, you really do need to prepare for the future.
Do I believe the RBA is going to extend us the grace of another rate freeze? Sadly, no. From my both my perspective – and the perspective of the experienced financial advisors I work with – interest rates are only going to increase. It’s essential that we prepare to ensure we are in the best possible position when those changes do come into effect in the coming months.
The first cab off the rank is the most obvious, however, it’s also the most influential and that’s ensuring you have a comprehensive budget.
Gone are the days of viewing a budget as a restrictive burden that makes a trip to the supermarket an anxiety rollercoaster. A budget is an incredibly powerful tool that gives us ultimate control of our money.
Remaining informed about the decisions the RBA is making ensures we are putting ourselves in the best possible position to adapt.
Arguably I’m more passionate about budgets than most, however every time I’ve sat down with a client to create one that focuses on their goals and needs, rather than restricting spending, they’ve walked away feeling empowered and excited, as opposed to overwhelmed and constrained.
Most of us know exactly what’s coming into our bank accounts regularly, however many of us don’t have that same oversight on how much leaves our account. A budget gives us the insight we need so we can see exactly where our money is flowing, and where it might not need to anymore.
Over the last 12 months Cait Bransgrove, director at Zella Money, has sat down with many clients to review their budgets and notes: “most people once they remove their own judgements and purely look at the numbers and whether their costs are currently serving them, find some additional free cash flow they didn’t know they had”.
Our second recommendation is to engage a good mortgage broker. They’ll be able to sit down with you to discuss how you could get a better interest rate or loan terms. However, it’s vital to find a broker that is not directly aligned to a bank, meaning they have access to a plethora of different options that you could utilise: from banks to credit unions and everything in between. A good broker will be able to assess all the options available to you and put your loan in the best possible position, while balancing your life goals and income.
The RBA is hyper-aware of the impact rate changes are going to have on Australians. But it’s important to note that they’re not doing this to punish homeowners. When the RBA is deciding on cash rates, they’re taking into consideration inflation, employment rates, retail spending, business conditions and international markets, their job is to ensure we have a sustainable future where everyone can thrive.
Last week Warwick McKibbin, a former RBA board member, warned of a potential “deflationary shock”, which is when prices for things we purchase decline, and could do so for a sustained period of time. This could have a massive impact on the economy because when prices decrease, many people stop purchasing things in the hopes that prices will continue to fall.
This can lead to Australian businesses struggling, people losing their jobs and the economy slowing down. He’s warning us of a ripple effect that impacts how much we spend and how businesses in Australia can operate. He believes the RBA should proceed with caution when increasing the cash rate again.
While the cash rate freeze does offer homeowners some temporary relief, individuals and households need to ensure they’re adequately prepared for future rate rises. Reviewing your overall budget, ensuring you’re across all your numbers and seeking professional advice can help you proactively navigate potential challenges and protect your financial well-being.
While arguably a little dry, remaining informed about the decisions the RBA is making ensures we are putting ourselves in the best possible position to adapt to whatever may happen in the coming months.
Victoria Devine is an award-winning retired financial adviser, best-selling author, and host of Australia’s number one finance podcast, She’s on the Money. Victoria is also the founder and co-director of Zella Money.
- Advice given in this article is general in nature and is not intended to influence readers’ decisions about investing or financial products. They should always seek their own professional advice that takes into account their own personal circumstances before making any financial decisions.
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