Inflation has been running rampant over the past year and the government and RBA are pulling their hair out trying to get it under control.
The most recent inflation rate was recorded at 7.3%, up from the previous rate of 6.1%. It is now at the highest point it has been in Australia since 1990.
But if you are paying attention to your grocery, energy and petrol bills, it likely seems more than 7.3%. Many goods and services have had more than 10% price increases in recent times.
So how does it affect my mortgage?
The first, and most obvious way, is that the RBA has been hiking interest rates. May last year, saw the central bank lift the cash rate for the first time in more than a decade. After that, it made up for lost time and has now hiked rates 10 times in a row.
Each rate rise saw lenders increase the interest payments on people’s home loans. During this cycle of increases, borrowers have seen their mortgage rates go from the mid 2% range to the mid 5% range and even more in some cases. The result is that some borrowers are now paying $10,000 or $20,000 or more per year in interest than they were at this time last year. Many of these people would now find themselves technically under ‘mortgage stress’ conditions, which means they are spending more than 30% of their household income on their home loan repayments.
The added problem is that, while rate rises are designed to bring inflation down, they haven’t yet improved living costs, so households are feeling even more pain.
And those who locked in low rates with fixed mortgages will have to deal with the shock of going straight into much larger repayments when their fixed periods expire in the coming months.
What if I don’t have a mortgage yet?
People looking to buy a property would have initially felt optimism at some of the price falls occurring as rates rose. But that was soon dashed by the realisation that their borrowing power was falling at about four times the rate of prices.
People who would have been approved to borrow $1 million in April last year, saw that reduced to below $750,000 before the end of 2022. In effect, they were further away from being able to buy than even during the lofty heights of the recent Covid price boom.
Adding to the difficulty is that the APRA-ordained repayment buffer of 3% – initially brought in when rates were at historic lows to hedge against the danger of rate increases- still remains in place. Once, you would have had your serviceability on a 2.5% interest loan assessed as if you would have to pay 5.5%. Now, with rates above 5%, you must be able to pass the serviceability assessment at a hypothetical interest rate of more than 8%.
This alone has knocked another chunk of potential buyers out of the market. And to add insult to injury, if they are renting, they are currently having to deal with soaring rents, as landlords pass on their extra mortgage costs to their tenants.
What can I do about it?
The first thing to do is to consider refinancing your mortgage. Record numbers of Australians have been refinancing in recent months.
If you have had your home since before the pandemic, chances are the growth of the last few years has boosted your loan to value ratio (LVR), which may put you in a better bargaining position for a better rate.
Seek out a better deal from another bank and be prepared to switch if your current lender won’t match it.
Some people have considered switching to interest-only repayments for some respite, though the bank will probably be reluctant and will give you a worse deal on interest rates than you are currently on.
Another option is to refinance to a longer loan term. So if your mortgage has 15 or 20 years left on it, your lender might let you change the term to 25 or 30 years and in some cases 35. This will bring down your monthly repayments, but of course, you will be paying the bank much more money in total over that extra 5 or 10 years.
Consider investing in assets tied to inflation
The thing about inflation is that every day, the money in your bank account is worth less than it was the day before. In real terms, you lose money every year….but if you can take the money or equity you have and leverage it into an asset such as an investment property, your money will be increasing in value over time and also create an income stream that is tied to inflation.
Those soaring rents will be getting paid to you and will keep increasing with inflation, while your debt remains the same or is reduced.