Managing the Rising Cost of Living

The rising cost of living has changed how we save and spend, and personal finance has become one of the leading worries for many Australians. In this article, Paul McKinley looks to lighten the load with a few tips on how to tackle this wave and better manage the undercurrent.

EXPIRING FIXED RATE MORTGAGES

The clear advice for anyone coming off a fixed rate mortgage is to talk to your bank or your broker.

Earlier this year, the Reserve Bank of Australia (RBA) predicted more than 880,000 Australian households had fixed rate home loans (with rates starting in the upper 1% range). About half of these (around AU$350 billion) will expire before this year is out, the RBA said, with rates reverting to anywhere from 5% to somewhere above 6%.

What this means is that households servicing an average $550,000 mortgage will need to find another $1,295 in monthly mortgage repayments. And that’s on top of other rising living costs! So where to turn?

To begin with, talk to your bank regarding the imminent expiration of your fixed home loan rate, and approach the conversation with a clear understanding of your financial goals in the context of the broader market dynamics. A mortgage broker can also initiate this dialogue (they’re having a lot of these discussions at the moment) well in advance of the expiration date, allowing ample time for evaluation and decision making.

Enquire about the renewal options available from your bank. This could involve exploring the possibility of extending the fixed rate with updated terms, if favourable. Also scrutinise any tabled changes in interest rates, fees, and potential repayment structures.

Simultaneously, assess the viability of switching to a variable rate. This approach could offer flexibility and potentially align better with prevailing market conditions. However, it’s important to weigh the associated risks, such as potential rate fluctuations and their impact on your repayments and financial position.

Before the conversation, equip yourself with knowledge about the current interest rate landscape. This will empower you to engage in an informed discussion with the bank or broker. Be prepared to articulate your longterm financial aspirations and enquire about how each option aligns with them.

Remember, your bank or broker is there to assist you. Openly express your preferences and concerns during the conversation and enquire about any potential incentives or offers your bank might extend to retain your business (it really doesn’t want to lose you!).

Once your bank has provided you with its best interest rate and options, if you have not already done so, engage a mortgage broker. A broker will have access to 40+ additional lenders. Ask your mortgage broker for a product comparison on the most competitive rates, fees, and products available, and compare this to what your bank has given you or – even better – ask your broker to include the product your bank gave you to compare against the others.

Two thirds of Australian mortgages are written via the broker ‘channel’. They have access to all the lenders, so can do all the research and submissions for you to secure you the best deal. And it costs you nothing! (A broker earns a commission from the bank only if the finance is settled – so you get to tap into their expertise, and time, for free.)

CASHBACK OFFERS

Lender home loan cashback offers present a real opportunity for prospective borrowers, however there are some nuances and benefits to be realised. These offers essentially provide borrowers with a lump-sum cash incentive upon finalising a home loan agreement with a specific lender.

Firstly, it’s important to recognise that these cashback offers can vary widely between lenders, both in terms of the amount offered and the conditions attached. Your broker can examine the fine print in these offers, ensuring you fully understand the eligibility criteria, loan types, and repayment terms associated with each.

Cashback offers can serve as a valuable financial boost to any household, helping to offset upfront costs related to your new home (or even service one-off unexpected expenses). These could include expenses like legal fees, moving costs, or even furnishings.

However, it’s crucial to approach these offers with a balanced perspective. While the allure of an immediate cashback is undeniable, it’s equally important to consider the overall loan package. Your broker’s expertise lies in conducting a comprehensive cost-benefit analysis. They will compare the interest rates, fees, and features of the loan itself, ensuring that the cashback offer doesn’t overshadow the loan’s long-term financial implications.

Additionally, some lenders might structure their cashback offers in a way that ties you to their services for a specific period. This can adversely impact your future financial flexibility. It’s important that the offer aligns seamlessly with your unique financial situation and objectives.

YOUR BUDGET AND YOUR BUFFER

Navigating your household’s cash flow effectively is paramount to securing your financial stability and achieving your long-term goals.

You need to know where you are to get to where you want to go, so start by assessing your current financial situation. List all sources of income and categorise your monthly expenses. This will offer a clear picture of where your money is going and help identify potential areas for saving.

When it comes to cutting back on household expenses, adopt a strategic approach. Begin by scrutinising discretionary spending, such as dining out, entertainment, streaming and subscription services and impulse purchases. While it’s essential to enjoy life, making conscious choices in these areas can yield substantial savings over time.

Review your utility bills and explore opportunities to reduce energy consumption. Small changes like adjusting thermostat settings, using energy-efficient appliances, and switching off appliances at the wall, can make a difference. Review your grocery spending, look for weekly specials, consider cheaper brands, and consider online grocery shopping if you get easily tempted to overspend in the supermarket. Fuel your car on the cheapest day. Renegotiate bills such as insurance premiums, streaming services, or internet plans. All these can translate into meaningful savings.

Given the array of economic changes impacting households, creating some buffer (savings) between your income and expenses will ensure that the worst-case scenario doesn’t catch you by surprise. Having an emergency fund for situations that are out of your control also provides further comfort and can be invaluable in helping manage the transition from fixed to variable rate mortgages, with resultant significantly higher home loan repayments.

There are also many budgeting applications and resources available online that can guide you with managing your personal finances. A number of budgeting apps also connect to your bank accounts and help categorise your spending and offer alerts (warnings) if you’re over-spending in a certain area.

Canstar (an independent and trusted financial comparison website) recently listed Beem, Buddy Frollo, Raiz, Splitwise, and WeMoney as their top six budgeting and savings apps worth considering in this area.

Knowing your current financial standing will bridge the gap between uncertainty and fear to comfort and security. Building good financial habits now will pave the way to a healthy future.

BRINGING IT ALTOGETHER

So, here’s the scoop on debt consolidation with your home loan – it can be a smart money move to make your financial life easier and lighten the load in terms of total cash outflows from your bank account.

Picture this: you’ve got credit cards outstanding, personal loans, and a car loan – all high-interest debt – and your mortgage, all giving you a headache. Debt consolidation steps in like a superhero, merging all those debts into one loan. Now you’re looking at just one monthly (lower) payment with a likely friendlier interest rate, meaning you should pay less interest in the long run – this can translate into significant cashflow savings for your household.

First, assess your situation by taking a moment to check out your current debts, interest rates, and your monthly payments. This helps you figure out if rolling everything into your home loan is the last piece to the puzzle, where handling one payment declutters your financials, giving you certainty, consistency, and better control.

However, stretching out the loan repayment might mean you pay more interest in the long haul. Also, remember your home? It’s your VIP collateral here. If you don’t keep up with payments, it becomes the big-ticket exposure in your asset portfolio. (But if you were managing to make all your repayments on time before, for all your loans, you should have no trouble managing the smaller, consolidated repayment.)

From here, a broker can carefully analyse your individual situation and help you determine whether debt consolidation aligns with your financial goals. If it does, your broker can help you navigate the application process, ensuring your financial goals are prioritised and explaining any terms and conditions of the debt consolidation.

Remember, debt consolidation should be viewed as just one financial option in helping manage the higher cost of living. There are other steps that should perhaps be considered first, like budgeting, before committing to this path.

Your starting point in helping lighten the financial burden in any household is assessing your current inflows and outflows. Once you have this ‘financial snapshot’, you can start employing some of the suggested strategies above to help navigate your way clearly through these somewhat turbulent financial times.

Paul McKinley CA BBus is the Managing Director of Optometry Finance Australia.