The elephant in the room
There’s an elephant in the room that nobody is talking about. We think his name is Frank.
Let’s be frank…
For the past 5 or so years we have been privileged to experience rates so low that many home owners took the advantage to jump into property. Mortgage brokers saw their business boom as they were able to refinance their clients from higher interest rates to lower rates and refinancing become the norm when it came to your mortgage.
Got a rate at 5%? We’ll offer you 4%!
Got a rate at 4%? We’ll offer you 3%!
And so on…
As mortgage holders we are marketed by the industry to get the best rate on offer. But what is the best rate for you? Well, the best rate is the rate that most fits your current circumstance at a point in time. It is a forever moving point of time due to daily changes of rates, lender policies and consumer spending conduct.
What do we mean by that? Well… if you spend more than you earn, apply for many credit policies at once, have zero savings it is evident that yourself, as a consumer, have developed a pattern of financial literacy that is detrimental to your financial health. If you approach a mortgage broker with this pattern of behaviour behind you, then please know that you will receive the best rate for you at a particular point in time – and that in saying so, it may not be the rate you want, but the one you will get.
On the other hand, if you are great with your money, have a strong budget in place, pay your bills on-time and don’t rely on credit or buy now-pay later services you would typically get a much better rate at the same point of time purely due to the positivity of your financial literacy.
Positive and negative financial literacy aside – there is a big problem looming…
Say you took advantage of cheap rates in 2020/21 and now your fixed rate at 1.8% (or less) is ending, and your broker can only offer you 5% or greater due to your positive financial literacy (a potential higher rate if negative conduct) and today’s current rates.
On a $450,000 loan at 1.8% you would be paying $1618.64 per month on mortgage payments. At 5% (or greater) your repayments would jump to $2,415.70, an increase of $797.06 per month, or $9,564.72 annually.
What if you took your loan at a point in time where you could afford your initial commitment easily, and have been able to save and live a great life – but now you can’t?
It’s an interesting observation above noting that the average national mortgage loan amount in Australia is just over $600,000 and that rates are still on the increase…
When you sit with your mortgage broker in the coming months and they offer you a rate that’s “so hot,” and the rate is 5% or more and you may have to come up with an extra $800 per month…
How is this result going to help your situation?
The other challenge as rates rise and lending conditions tighten is the potential of home values decreasing, so if you were relying on equity within your home to refinance you from one lender to another because they have better policy or greater rates if you have over 20% deposit (usable from equity) it may mean that you are stuck with your current provider and/or debt level for the time being.
How are you going to solve these challenges alone and not certain of the way forward?
We have mainly covered existing home owners in our thoughts above, but what about first home buyers? How are they going to navigate the uncharted waters going forward? Everything happening now is having a flow on effect…
As much as we recommend you talk to your mortgage broker, the best thing you can do in these times is check in with your BUDGET and develop a plan for the coming year in the midst of rate rises continuing.
In our honest opinion, NOW is the time to learn.
NOW is the time to adult.
And NOW is the time to take responsibility for your loan, your financial future and your financial literacy for good.
The best thing is that YOU can do this, but nobody can do this for you.
With the right tools in place you can navigate the uncertain waters ahead. You do not need to outsource your financial challenges and you can choose to work with us to navigate forward.
With rates poised to rise again in March 2023 and more rate rises on the horizon, it means that more pain and frustrations lay ahead for mortgage holders.
It is never too late to stop, reflect and reset your goals.
Need help with your budget? Get in touch…