How Interest Rates Affect Your Mortgage

to take advantage of the low rates through Covid and enter the housing market. In outer city suburbs like Werribee in Melbourne’s south-west, families such as that of Keith Nallawalla and his partner Kayla Mackinnon (along with their soon-to-be two children), are having to make ends meet with a huge $900 mortgage increase on their average 4 bed 2 bath family home since the rates began surging in May 2022. This is only set to continue increasing.

Variable Vs Fixed

Fixed-rate loans are exactly as they sound – the rates are fixed and do not fluctuate with rate increases. These are generally locked in for a period of 6 months to a few years. People with fixed-rate home loans haven’t been affected by these increases.

Variable rate holders on the other hand aren’t so fortunate. If the board of the Reserve Bank of Australia (RBA) decides on a rate increase, this is more often than not passed onto mortgage holders through their banks. On an average $500,000 loan, this equates to approximately $900 a month in just 10 months’ time. In May 2022, mortgages that were approximately $2,100 a month are now around $3,000 a month. That’s a massive increase in such a short amount of time and families are struggling.

The RBA is estimating that around 800,000 mortgage holders will be “rolling off what were ultra-low fixed-rate mortgages onto variable rates this year” – these mortgage holders are in for a rude awakening.

How Can You Make Sure You’re Getting The Best Deal?

Sally Tindell from Rate City has suggested that those who currently hold a fixed-rate loan to “talk to your bank as soon as you are looking at moving off a fixed rate onto a variable and negotiate”. She suggests looking at the rates your bank is offering new customers and using that as “ammunition” when negotiating. She also suggests looking at what their main competitors are offering and using that as leverage to swindle a better rate from your loan provider.

Factors That Influence The RBA’s Decisions

Inflation

Inflation is worldwide, from supply chain issues to China shutting down imports and exports in order to achieve Covid Zero status, the supply and demand of goods and services is in unbalanced. There is a huge demand for goods and services that cannot be supplied, this is bumping up the cost of everyday items and making it difficult for a lot of people to afford even the necessities.

The Russian war against Ukraine has also had a massive impact on the inflation of fuel prices. Russia is one of the largest producers of crude oil around the world, this affects the cost of goods such as petrol and plastics and even textiles. The Russian war has had a massive effect on every facet of the global economy and is a big contributor to inflation.

Cost of living is a massive “buzzword” being thrown around at the moment, and for good reason. Suicide Prevention Australia is reporting that “46% of Australians are reporting high rates of cost of living stress”. That’s a staggering statistic, especially when you consider that it is coming in from people who are on dire straights with their mental health and that these rate increases are a contributing factor.  

Unemployment rate

The unemployment rate is another big contributor to the RBA’s decisions.

Put simply, the more people who are employed, the more people have money with which to buy goods and services. This in turn increases the demand for goods and services that cannot be supplied.

It’s an unfortunate fact of the modern economy that for inflation to be within the RBA’s ideal 2%-3% band, a certain amount of people need to be unemployed and therefore on welfare so they don’t have the finances spare to spend on non-essential goods and services, and so they bring this spending down.

Wage growth

There is a wage growth theory called “the wage-price spiral theory” – read carefully because this can get confusing!

When there is a prolonged period of wage growth, this provides people with access to more disposable income.  This disposable income then increases their ability to spend and thus the demand for goods increases while supply remains the same and this causes prices to rise. When prices rise, this causes demand for higher wages, which then leads to higher production costs and further upward pressure on prices. This is the spiral.

This is what the RBA is trying to avoid happening by keeping the rates high, while employers keep wages as is. This should squash any ability for the everyday family to spend excessively.

Lifestyle Changes

With everything going up, families are trying to find a way to save money anywhere they can and also to make money wherever possible.

Selling household items is a great way to make some money while not doing a whole lot. It’s also a great excuse to clear out that garage you’ve been putting off since Christmas. Going through and selling things you no longer need such as baby items (especially if you’re done having children unless it’s sentimental, sell it – people are always having babies and looking for a bargain). Look at what you haven’t used in a while or clothes you haven’t worn in over 6 months and sell them. You’ll be surprised at the money you can make, all while just doing a spring cleanout.

On the flipside to the above, look at purchasing secondhand. Besides car seats and cot mattresses, there isn’t a lot you shouldn’t buy secondhand. Facebook marketplace is a wonderful resource for opportunistic buyers (and sellers alike) to find what you’re looking for without the shop price tag. It’s important to know how much the items you’re searching for retail at so you know whether you’re actually getting a bargain or not, and don’t be afraid to negotiate or ask for bundle deals.,

Another way to save some money is by going without luxuries such as Uber Eats and going out with your friends every weekend. Instead, look at taking your lunch to work and meal prepping dinners, and inviting your friends over rather than heading out for the night.

Doing a shopping list and comparing prices of your groceries, as well as writing a weekly menu will help you target shop so you do not have to peruse all the aisles at the supermarket trying to think of what you need – and don’t go hungry.

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Changing a few small things will help your bank account and your sanity while these rate increases inevitably continue. As a bonus, if and when the rates fall, if you manage to keep the same frugality and money-saving practices you could end up with some good savings!