Borrowers all around the country will be very keen to know if the latest Reserve Bank interest rate increase will be the last. Are we there yet?
There is a good chance that we are. When announcing the last rate rise the RBA Governor said sternly that we shouldn’t be complacent as more rises may be needed. He seemed to be trying to persuade people to spend less, so demand and inflation will drop, and extra increases won’t be needed.
Inflation must be reduced because out of control price rises driven by a wage–price spiral would do much greater harm than painfully high interest rates for a period. Last week’s Federal Budget will put mild but not serious upward pressure on inflation.
Home buyers with mortgages are having to adjust their spending to accommodate bigger loan payments as the higher rates bite. Spending on personal pleasure items faces the axe. Even though rates are likely at their peak now, they won’t come back down soon or quickly.
They are likely to stay at this level for the rest of this year and possibly into next. The Government’s proposed restructure of the RBA Board won’t reduce inflation or interest rates. It is largely a distraction.
Should those with fixed rate mortgages maturing choose a new fixed rate or stay with variable? Many fixed rates on offer are similar to variable rates, so fixing a new rate for a long term isn’t sensible. A one-year fixed rate might be helpful if it is below the available variable rate.
Researching what banks other than the current lender offer may identify a better deal. Knowing that information can also help borrowers negotiate a better rate with their current lender.
There are several possible strategies to help with the higher loan payments. The first is obviously to cut out non-essential purchases. A fellow who sells fancy fishing lures online told me demand has dropped sharply in the last couple of months, suggesting that is already happening.
Cutting loan payments may seem unlikely but in some cases it is possible. Multiple debts can sometimes be consolidated into one home loan to reduce the total loan payments. People with equity in their homes can eliminate car, personal and credit card loans, with a small increase in their home loan payments.
Some people could consider getting a second job part-time to earn more income. Working multiple jobs in order to meet the family’s living costs used to be very common a generation ago. It seems less usual today.
Some workers may be overdue for a pay rise and perhaps could ask for one. Others may have the opportunity to work overtime and earn extra income.