My Basic Mortgage Tips: For times of rate rises & well, any timeFeb 09, 2023
In this week's Video I talk about the interest rate increase we've had in Australia and how that's not something that has just been confined to us. I then go on to share some basic tops you should be doing if you want to get into a mortgage or if you have a mortgage - regardless of whether rates are increasing, stagnant or falling.
Oh and my bonus tip? Ask your bank for a rate reduction. Need help with that? Inside the My Financial Adulting Plan we have a whole module on Investing in Property including scripts to use to ask for a rate reduction and we'll support you if they come back with a no.
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Of course, if you know that you need more help check out the My Financial Adulting Plan via the link below. Next round opens on 14 May 2023.
Hey and welcome to Mel's Money Musings.
If you're new here, then irregularly on a Friday, if something crops up in the news or if there's something I think I wanna lend my voice to, then I'll jump on here and let you know. So it doesn't happen every Friday because I don't just wanna pepper your inbox with things that kind of aren't timely and relevant to you. Instead there when I see too many clickbait headlines or I wanna add my voice to something that I think you should really know about.
And in Australia this week we've had another interest rate rise, which means it's our ninth and we've now had our rate increases have equalled 3.25% since May next year, which is a jump. And this is relevant to you today, whether you are in Australia feeling the brunt of those interest rate rises, or if you are in another western country like New Zealand or the UK or the US or one of the many countries where since the last 12 months we've had this spike of interest rate rises.
And what I wanna do today is to share some practical tips so that you can ignore the clickbait headlines. You can ignore the chicken little, sky is falling headlines and you can know, yep, I might not love interest rates rising, but I have a plan and a strategy and I'm not just relying on luck.
Because what we know is that financial literacy globally is falling, meaning that you know less about finances than you did a year ago or two years ago, or three years ago at a time when it's more uncertain than ever before. So it's a time really when that financial literacy needs to be rising. And that's part of what I see my role as an ex financial advisor and an ex-accountant and now a financial educator is yes, to give you these free tools, but also within my programs, within my masterclass, for you to actually come and deep dive and to create that strategy, that plan and feel that confidence come back. Get back into the driver's seat of your finances.
So let's get into it. It doesn't matter if interest rates are rising or not, what I'm telling you today would be exactly the same. And that's really important for you to hear because sometimes things are done in a timely manner, meaning that something happened and so therefore it's a reaction. But sometimes you wanna do things simply because they're good to do. And the tips that I'm gonna give you today are things I think you should be doing regardless of whether interest rates are rising or not. And that means if you do those things, you can kind of ignore the click bait headlines. You can listen to them and be curious around what economists and experts are saying, but you are not gonna be stressed about it cause you already have a plan in place.
So some easy tips if you have a mortgage or if you want to get into debt, good debt and okay debt, not bad debt.
So very quickly, if you wanna get into debt, especially at the moment, you wanna speak to a mortgage broker before you are ready. So if it was me and if I was thinking of buying any sort of property within the next 12 months, I'd be going and speaking to a mortgage broker. And you might say, but yeah Mel, I'm not gonna be ready till the end of the year. So what? At a time of rising interest rates, at a time when the goalposts are shifting a little bit, you wanna go in with every chance of success. You wanna understand what the bank manager's looking for. If you go and sit before a mortgage broker the week before you ready to pull the pin and they said, yeah, it would've been really helpful if you've done this, this, and this, you don't wanna have a time capsule because they don't exist, you wanna go, great, I have time and now I'll do that.
Plus what I've know is that I've sent clients to do that in the past and they've come back to me and going, oh my gosh, we are ready now. And we didn't realise it. So one, if you are thinking of going for a loan, my hot tip for you is go and speak to a mortgage broker before you are ready.
If you have debt, if you have a mortgage, here's my tips for you.
As I said in a time of rising interest rates or not. One, pay your mortgage as if interest rates will 1% higher. So go to a mortgage calculator. If your interest rate today is 6%, put in what it would be your repayments if it was 7% and pay that. But pay the difference between the minimum payment and the extra per cent into your offset account. That builds a buffer. Gets you used to rate rises so that if you have rate increases, you'll continue to increase that amount that you are increasing. But it starts to build a buffer as well of dollars so that if life happens, you've got there and you're ready. And 1% extra repayments generally means your loans being paid off around six years earlier. So that's not bad, right?
So that's the first thing. The second thing is to make sure you don't have bad debt. So no credit cards, no Afterpay, no buy now pay later, no payday loans. And the reason is that in times of rising interest rates, a lot of a lot of us are feeling financial squeeze and a lot of that is due to lifestyle creep cause when you go for the loan, the bank assesses you as if interest rates were 3% above. And yet what we do is we pay our loans as if they are what they are and then we adjust our spending to suit.
So what I know about bad debt, about credit cards and buy now pay later and more is that when we use that, you may be paying it off every month but you are overspending. And the data supports that. So Afterpay's own website says that to retailers that if you use Afterpay, you are gonna spend 40% more. That's how they justify the higher fees.
If it's a credit card, Citibank who sells credit cards, in its own research found that it's 12 to 18% more. And let me tell you, if someone that's selling credit cards is saying that when all of the other research is saying up to 100%, this is at least what you are overspending.
And part of it is just brain research around digital payments not hurting as much. So we spend more. So if you are sort of sitting there smuggling when people talk about credit cards, that debt and bad debt and go, huh, I pay mine off every month, you are paying a tax by simply using them because you are overspending. And at the moment, what do we, what we wanna do is make sure our lifestyle creep doesn't climb. We wanna take that back in control and we wanna get rid of that bad debt.
Number three is if you are on a fixed interest rate or an interest free loan and that's coming up within the next 12 months, you wanna go and speak to your mortgage broker now. And that's because if there is equity issues with your house and if that there is a drop in value, if you have had some wobbles in your career because of the pandemic, then you wanna make sure you have a plan now rather than waiting till the last minute and feeling like your options are completely limited.
I think there's a tsunami of issues coming. Now I've said that about clickbait headlines, but I think again there's a swell of issues coming around fixed interest loans, apparently there's one in five people have some sort of fixed-interest loan and a lot of them are coming off soon and a lot of people locked them in at 2% and 3%. So that's gonna be problematic in the year or so to come.
Now what you should be doing is if you have one of those gorgeous low fixed interest loans, start to pay the extra into another account, a high interest account or an offset account if they'll allow you to have one, so that when you come off that rate, yeah, I don't care. So start to build a buffer with that.
Which brings me to my next point is have a buffer account so that if life happens, so that if you have a wobble one month, a buffer account of up to three months worth of fixed expenses there so that you're not relying on bad debt so that you can grab it if you need it.
And finally, keep investing. Now what we don't wanna do is just go, is panic and pay off our house to the exclusion of all else. Cause there's a no adage that I've been talking about for a long time that you can't eat your house. Meaning if you just have your house and that's it, everything suddenly is gonna be reliant on that super funds or those retirement funds versus starting to develop multiple income streams by investing and paying off your mortgage a little bit faster at that extra 1%.
So practical tips, no matter what if interest rates were climbing or if interest rates were falling or if interest rates were steady. What I am here to tell you though, if you're in Australia, is that there are more interest rates coming. The Reserve Bank Governor highlighted that in his speech this week when he said that inflation is running too high. He wants to do it three to 4% and he's prepared to keep interest rates going until we get there.
In my view, and I've predicted all of the interest rates last year, including the amounts, I think we've got at least three more in the first half of this year. So strap in, put in place my tips, and then sleep at night knowing you've got it.