Uncensored Money Season Three: Property and Interest Rates

Melissa Browne: Ex-Accountant, Ex-Financial Advisor, Ex-Working Till I Drop, Now Serial Entrepreneur & Author, Financial Wellness Advocate, Living a Life by Design | 04/05/2022

Show Notes

This week the Reserve Bank of Australia put its rates up for the first time since November, 2010. It’s the rate rise that everyone saw coming but that doesn’t mean the clickbait headlines aren’t everywhere. That’s why Mel and Lawsie jumped on for a podcast full of practical tips for what this interest rate rise (and the interest rate rises to come) mean for you.

If you want to know more, make sure you register for their FREE webinar on Debt https://www.melissabrowne.com.au/debt  

Or jump straight onto the Waitlist for the My Financial Adulting Plan which opens its doors on 15 May 2022.

A mortgage repayment calculator link is also here: https://moneysmart.gov.au/home-loans/mortgage-calculator

If you're not already, come play over at insta at MelBrowne.Money and make sure you are signed up to Mel's Money Musings and Monday Money Moments (yep, we love us some alliteration) for more tips, tricks and ideas on how to best work with your money.

Finally, if you love this episode please make sure you subscribe and leave us a review.

Transcript

Mel: Mortgage stress set to rise. Borrowers at risk. Sydney householders struggle. Are you at mortgage stress? Thousands at risk of loan default. Mortgage stress postcodes reveal. Yep today, we're gonna be talking property and interest rate rises. Now these are just a handful of the headlines from the past week about mortgages and interest rates. And there are hundreds more. And if you are feeling stressed or even uncomfortable because of the talk of looming interest rate rises, maybe headlines like those have something to do with it. So what I wanna do today, ahead of Tuesday's decision to lift interest rates, is to calmly talk through what rising interest rates mean for you. And the reason I say rising is because this is the first of quite a few interest rate rises that I think we are going to see over the months to come. So rising interest rate rises. Now I've been talking about this for over a year now. And at the end of last year, Lawsie I predicted an interest rate rise in the first half of this year. Not because I've got a crystal ball…

Lawsie: Oh, come on. I thought for sure, that's why you were doing it.

Mel: That's simply because all the signs were pointing that way. What were those signs? Record low interest rates that have been low because of a reason, to stimulate the economy because of COVID. Rising wages, rising inflation, record property prices. Is it any wonder that rates were going up? Plus I was looking across the ditch to our friends in New Zealand and seeing their rates start to move, looking to the US, seeing their rates starting to move and telling people it is only a matter of time.

Lawsie: Yes.

Mel: But here's the thing: I've also been banging on about what you should and could be doing about it. So hopefully you've been following along and have done that. But in case you haven't, or in case you wanna refresher, or if you are feeling stressed and uncomfortable simply because now it's happened and you're looking at the clickbait headlines, Lawsie and I are gonna talk you through what it means for you, what the interest rate from Tuesday means for you and what the coming interest rate increases mean for you and what you can do about.

Mel: So Lawsie were you shocked?

Lawsie: God, we're good.

Mel: We are good, aren't we? We're lovely.

Lawsie: Look, I wasn't shocked. I guess the timing of it surprised me and I'm not one to lean into politics and elections and all such things like that. I had thought like, obviously, you and I'd been talking a lot about it. So it was, and as you'd been saying for so long, it's a case of when, not if. So, definitely kind of waiting for it just as a yeah. It gave us a podcast topic. No, I'm kidding. But it was definitely one of those things that we had just been sitting around, waiting for it. And given that the election is obviously later this month, I was a little surprised that it happened today. I thought, oh, for sure. Everything else is on hold for whatever reason or there's an election and the entire economy just seems to stop. So the fact that they did that today surprised me. I honestly thought in the end I was, well, I obviously have no insight or knowledge, but I was kind of just going, oh, you know what? There's been all this talk about it. At least everyone's prepared. Like it can't be a shock. Even if they hadn't for some reason been following you at the end of last year and all the other times when you've talking about it, like there has been so much in the media around it.

I mean, you pointed out just the headlines in the last week. So I think if anything, it was making sure that everyone was aware that it was going to come. I just was a little bit, oh, they did actually do it today. Like it did surprise me cause I genuinely just went, oh, they'll leave it till after the election. Cause no one can be held to be trying to do anything to influence that and whatever else and blah blah. So yeah, a little bit surprised to the timing, but not surprised that the rates actually went up..

Mel: I was sure it would happen, but then about a week ago, so I watch Sports Bet, and the betting money for who's gonna win the election and for things like rate rises, because as well as often, they're right. It was basically a hundred per cent. Like it was, it was even money. It was definitely happening, the rate increase. And then I think about four days ago they changed it and the money started coming in to say it wasn't happening. And I'm like, what's going on? And even Stephen Koukoulas and different economists that I follow were like, what's happening? Who knows something we don't? So I had certainty up to a few weeks ago where, as much certainty as you can with these things.

Lawsie: Oh, of course.

Mel: But, uh, yeah, this week I'm like, oh, come on. Surely?

Lawsie: Did you put some money on it? I mean, let's get to the real questions..

Mel: No, no. I don't bet on politics or interest rates.

Lawsie: No. Oh, what's wrong with you?

Mel: Crazy thought. So we are not surprised that it's happened and hopefully you are not either. So we wanna talk you through what this means for you, but let's start with cause there's a lot of talk about mortgage stress, but let's talk about saving and investing.

So if you're older person, and you're looking at retirement, this is good news for you. If you're looking to earn money from your savings, this is great news that interest rates are going up. If you are saving for something, if you've got money in the bank and yes, we'll get to house deposits and things like that later. Yes, it is good news for some people. And only a third of people have a mortgage. Only a third of Australians have a mortgage. So for two thirds of people, it's not the worst news in the world.

So interest rates yesterday, though, for those of us with a mortgage or those wanting a mortgage, it went up 0.25% on Tuesday. So Australia's average mortgage is just shy of $600,000. So if that's you and you are sitting on a fairly average mortgage, which is crazy that that's an average mortgage, but that's where we're at, that interest rate increase equates to an additional $121 a month or $4 a day. Yeah so when you are seeing things like mortgage stress and thousands at risk of loan defaults, I want you to say to yourself, if I have an average loan, that's four bucks a day.

If I had to find four bucks a day, I could find four bucks a day. So let's start with that. Yes, we're expecting them to move further. And we'll talk about that obviously during this podcast, but this first rate rise equates to $4 a day. So yeah, I think that's the first thing to put on the table. So there's certainty around what it means.

Lawsie: Yeah. And just that framework for it, because if obviously, if you've got a mortgage that's less than 600 K, then it's gonna be less than $4, you need to find a day. And if you are high sitting higher than 600 K, then obviously the amount that you need to worry about is gonna be a bit higher than $4 a day. But it's not the absolute doom and gloom that some of the headlines are gonna make it out to be.

Mel: Exactly. So what can you do? And it's something that you and I have been talking about, or I've been talking about in my musings, and we've talked about in a podcast episode last year, around what you should be doing. And I wanna say from get go, you should be doing these things anyway.

So it doesn't matter if it's time of interest rate rises. These are great things to be doing anyway if you have a mortgage. So it just happens to be in a time of rising interest rates that they actually become even more sensible to do. So Lawsie, let's talk you through of the big three that we talk about when it comes to, if you've got a mortgage, some sensible things that you should be doing.

Lawsie: Yeah. So I think the first thing that we would always recommend is to be paying a little bit more on your mortgage than what the bare minimum is. And to quantify that amount for you, we recommend paying one to 3% higher interest rate than what you're currently on. Because by doing that, when these interest rate rises occur like recently, and as they will continue to do, you are already therefore protected. You're not gonna be like, oh, I've gotta find that $4 a day. So I will actually know that $4 is just using up some of that buffer that you're already putting in.

So, and I think just to clarify that when we are saying that one to 3% higher than your interest rate, that's not saying you have to do a whole one to 3% higher than what your whole mortgage repayment is. We're simply saying chuck it into, you know, a loan calculator online and go, all right, what are my repayments now? You know that cause you're seeing it come out of your bank account. But what would it be if I increase the interest rate by that one to 3%? So if things are a bit tight, you might just do the 1%. If you feel like you've got a little bit more room to move, you might go for the 3%. Put that in and see what that difference is. And if it means that you need to pay an extra couple of hundred bucks a month or whatever, pay that, but just pay it into your offset account if you've got one. So that way you still have access to cash if you need it, really easy and accessible to you. But at least you are already in that habit of paying more than what you need to. So when something like the Tuesday rate rises happens you just go, nah, it's water for ducks back, cause you're not scrounging on the car floor for your $4 a day.

Mel: Yeah. So I love that. That's exactly right. And the reason we say to put it into your offset account is so that if you decide later on to make that an investment property, the flavour of your loan hasn't changed and you haven't paid extra off onto the loan. But also when we saw this at the beginning of COVID with ME bank, the bank has the ability... just say, property prices start to fall and you lose a job and the bank finds that out, if the bank thinks your circumstances have changed and you can't pay your mortgage, they can grab your redraw and lower your loan. But in if they're in the offset, they can't do that. So it's just a safer place to park your cash. So what we'll do is we'll put a link in the show notes for a repayment calculator, but every bank has one. And what's gonna be interesting Lawsie like, if you are listening and you don't know your interest rate and you are having to base it on the amount you repay, this is a good thing cause you should know your interest rate

Lawsie: Yes. And the bank will send you a letter soon to say what is going to as well.

Mel: Exactly. So that's the first tip. So pay an extra one to 3%.

The second tip is to ask your bank for a rate reduction. So if you are part of the My Financial Adulting Plan, you will already have done that. And we give you scripts and all sorts of stuff inside the My Financial Adulting Plan, we show you how to do it. And we're there for you if you get a bit of pushback to help you navigate that. But the average rate reduction that people inside the My Financial Adulting Plan have got is 0.5%. So they're still in front.

Lawsie: They're still saving

Mel: Uhhuh. So our second tip is if you haven't asked for a rate reduction in the last 12 months, go to your bank and ask for a rate reduction and you might be saying, oh, the interest rates just went up. They're not gonna give it to me. Rubbish. Why wouldn't they? If you'd asked last week, they knew that it was probably gonna go up. So still go and do it, and then put a diary note in your calendar and ask for it every year. If you use a broker, go to them and make them work for their commission that they're getting and ask them to approach the bank on your behalf, or ask your bank manager to sharpen their pencil and do it.

What I'm a fan as well as if you have business loans, cause this rate rise will also affect your business loans potentially is just go to your bank manager and say, so I've been with you for X amount of years. This is everything I have with you. This is what I did recently. I just said, I'd like you to sharpen your pencil. I just want you to come back to me with your best deal. And if I'd just gone and said, I want a better interest, that's potentially all, all I would've got. But by saying, I just want a better deal, I want you to sharpen your pencil, I got a drop in fees, I got a drop in interest rates just across the board. So it's just asking for it like, so if you, it's not just doing it for your mortgage, it's doing it for all of your loans. So that's our second tip. Go and ask for a rate reduction.

Lawsie: So the next one is just making sure that you have a buffer. So in the same way that we're saying you should pay that extra one to 3% on your current interest rate and pay that into your offset account, it's also about making sure that you're not spending every last dollar in your bank account each and every pay and that you are building buffers and emergency accounts, an 'oh $hit' account, whatever you wanna call it cause I know people have got all different names, and they're far worse than that too. But just making sure that you do have access to dollars so you can, again, it's just the case of being able to redirect some of your funds, if something happens and if you're in a position where, oh, I do need to actually start finding some more dollars within my everyday cash flow to fund those mortgage repayments.

So as a bit of a guide, we recommend having as a starting point, about three months' worth of your living expenses as a buffer. And for some people, they go 'oh my God' that's a whole lot of cash. I don't need access to that much and that's fine. Like you can absolutely have less than that. For others, they're gonna go three months and go, oh, a thought of "only" in inverted commas, having access to that much cash gives me anxiety and so I've gotta have six months or 12 months.

So use that as a bit of a guide or as a bit of a starting point, just to think about how much cash you actually want to have set aside. And I think, if haven't already, then making sure that when there are interest rate rises and things like that, that you are factoring in that your mortgage rate repayments could be higher.

So when you, or if you reach that point where the amount of your mortgage repayments that you have been paying actually does increase with these interest rate rises, just making that note too to, okay I've gotta increase my buffer then to take that into account as well. So you're not sort of going, oh, I've got three months' worth of expenses or whatever. Something happens, you draw down on it, something else, another emergency happens and then suddenly going, oh crap, I haven't allowed for those extra mortgage payments that I need to make. But just super important to make sure that you've always got access to cash and that can stay in your offset account

With other things that you're doing, so yes it's not going to be earning you a whole lot of money. We know. I mean, yes, interest rates are rising, but you're gonna still always be paying more interest on your mortgage than you're earning as income in the bank account. So you can have your buffer in your offset account. You can do all those things, but just super important that regardless of what happens with interest rate rises, you're still making sure you've got access to cash if, and when you need it.

Mel: And that means too, that if something happens or if you get sick or the worst happens, you are not at stress because you've got those funds there to see you through.

And I would be going and reassessing that buffer exactly like you said, cause it's not just that interest rates are going up. It's that cost of living's going up. You and I have had discussions around how expensive, how our grocery bills have gone up. So now's a beautiful time to reassess that and say, you know what? I had five grand in that buffer account. I think I might increase that to six over the next 12 months because that five's not quite enough now with these inflationary pressures and that higher cost of living. And it is remembering that life happens, you know, uh, my hubby's been sick from one day to the next about six weeks ago. I had the same thing happen to me a few years ago with my neck. It is like, life can suddenly just happen and buffer accounts and having these extras that we've been saving and extras we've been paying off means that we're not stressed when that happens.

So what we don't wanna do though is just concentrate on paying off our mortgage and that's it. Like, now's not the time for you to go, oh, I'm so fearful. I just want that mortgage gone. I'm just gonna fixate on that. And we've got a webinar coming up in a couple of weeks around why that's a really dangerous strategy. And we'll put the link to that in the show notes as well, because we want to have comfortability with debt as long as we're treating it respectfully. And how you treat debt respectfully is by doing all the things we are talking about today. By paying it off higher, by having a buffer account, and doing all those sort of things. And we'll talk about more tips as well.

But it's not necessarily a tip, but it's also being aware that the bank assesses you at an extra 3%. So even if you've got a loan in the last six months when interest rates were at their lowest and you're thinking, oh my gosh, there's no way I can pay it back now. The banks have assessed you at an extra 3% and that means we've had 0.25% increase today. Interest rates could go up by another 2.65% and the banks have still assessed that you'd actually be okay.

And let's be honest, banks are conservative. So when you see those mortgage stress headlines, unless your situation has changed, unless you've lost your job or something like that. I just want you to remind yourself that the bank has assessed me at an extra 3%. Now your lifestyle creep might have happened. I think we all during COVID, we all stripped back. You know, we weren't travelling. Kids weren't doing a lot of after-school activities. We weren't going out and eating. You know, a lot of people talked about saving a lot of money. Whereas now it's all just gradually creeping back. Like a frog in a pot of boiling water. And again, now's the time to assess that and go, all right, now's the time to strip out some of that.

So I don't have that lifestyle creep so that I can afford to pay that extra one to 3%. Cause if you use that mortgage calculator and go, oh no, no, no. I can't pay that. Interest rates are going up by that much. So yeah best figure out how you're going to do that. Like now for me, this is the canary chirping in the mine shaft going, hello, I'm running out of a bit of oxygen. So you need to reassess and make sure you can pay it at one, 2% more now, rather than being forced to later on. And that will also, as Lawsie talked about, build you up that beautiful buffer.

But it's also, if you are someone that's going for a mortgage soon, it's also talking to a mortgage broker now, before you are even ready perhaps, to figure out what the rate rise means for you because, first of all, it's a teeny tiny rate rise so it should mean very little. But there's also a whole lot of stuff that you can be doing now to prepare yourself for that mortgage. And that includes closing down 'buy now pay later' accounts, closing down credit cards and potentially changing your spending. So I would make an appointment with a mortgage broker and say right, can you assess me? And let me know how I can be the best candidate for a loan. It's kind of like getting zhuzhed up for a date. You know, I'm not gonna rock out of bed and turn up. Dates can go, that's not your profile pic. Oh, interesting. But it's actually putting in an effort so that you look like you're an attractive candidate for a loan.

So if you're looking for a mortgage, if you know that's going to be you soon, and you are worried about what these rate rises mean for you? Go and speak to a mortgage broker now. But Lawsie, it's something you and I talk a lot about just because you can doesn't mean you should, when it comes to mortgages.

Lawsie: Definitely. And that's all just around that the banks might come back and go, you can borrow X amount, but it doesn't mean that you have to. So it's just, I guess, being aware. It all just comes down to being prepared. It's like, okay, I know how much I'm willing to spend or able to spend. But how much do I actually want to spend?

You and I, we've spoken about it before, but when we first went for our own home mortgages and all those things, we were offered way more than what we ultimately decided to accept. And the reason, I mean, shouldn't talk for you, but the reason why my husband and I did it was because we looked at and went well, that's nice, but then I'm tied into this commitment. Whereas we were actually happy to borrow a whole lot less knowing that we could still repay that at a higher rate. But it also then gave us options to be able to still do the things that we wanted to do such as travel or that we could save cause we had to do repairs and renos to the house or whatever the things are that are going on. So just making sure that yeah, just cause the bank comes back and goes yes, you can borrow this amount, you don't suddenly make that your new target in real estate.com when you're doing your searches and all that kind of stuff to be like, oh, well that's the level I'm looking at now. It's like, well hang on no. What is it that we actually want? What are we wanting? You know, what are our bigger goals and everything? Cause there's more to life than just owning a house.

Mel: Yeah.

Lawsie: And having a big mortgage. So, you know, what other investing goals do you have? What other freedom and flexibility do you want down the track? Do you want a family? Do you wanna take time off to have a sabbatical? Do you just wanna go and travel? Like all of those things come into play and of course you don't wanna be taking out the maximum amount that you can, if you are someone that is gonna be stressed by all of these headlines and talk of rising interest rates and all those kinds of things. So absolutely being a bit savvy with that.

Mel: Yeah. And we've talked about that so often that just because you can doesn't mean you should, and both of us didn't go for that big massive loan. And I'm so grateful that I didn't, cause yes, we could have serviced it, but there would've been so many things we couldn't have done that it would've prevented us doing. And again, that's part of what we talk about in that webinar. So that's gonna be a really good one.

But it's being aware that there are still great rates available. So I jumped on to look at what variable rates are at the moment. If you are an employee, so if you're a wage earner, TikTok have got a rate of 1.9%. Like Nano, 1.99. 86400, 2.1%. So all the digital banks still have ridiculous rates. Like they might go up to maybe 2.2, but that's a freaking ridiculous rate. UBank is 2.09. All the majors will be higher. But if you look at fixed, so UBank has a three year fixed rate with a 4 in front of it, a 4.25. And if you are wondering what rates we'll get to, the fixed rates essentially are, uh, are an alarm or a highlight to say for the banks to say, this is where we think rates will be.

So if uBank are showing 2.09 now, they're kind of suggesting that they think that rates will go up by about another 1.9 per cent including the lift today. So it's just being aware of that, and that's where we talked about it at the beginning of the podcast episode; more rates are coming. More rate hikes are coming. Yeah. So just be prepared for it.

Lawsie: Definitely. And I think, I mean, one of the other questions that will no doubt come up at the moment is people go, oh, you know, I think there's been a big trend of just keeping it variable because hey rates have, have gone down, like depending how long you've had your mortgage or whatever you have seen rates go down.

Or they've always been at this rock bottom low and so people are like, oh, variable's great. Why would you pay more when it's fixed? And things like that. So again, it's just about coming back to that conversation where we're going, well, how much do you actually borrow and things like that. You generally will have a choice if you have a variable rate loan, a fixed loan, or you can even have a combo. And I think it's just people being aware of that, cause they think that people are gonna be more conscious around, oh, okay. So rates are going up. Oh, what does that mean for my variable loan? Cause it obviously has the option or has the ability to keep going up now. Whereas your fixed loan is as the name applied, fixed. It's not going anywhere.

So for people, if you're nervous about that, then again, talking to your bank or your broker and you might decide, actually I'm gonna lock in part of that cause I prefer to know that I'm paying a bit of a higher rate, but I've got certainty on that. And then it's only part of my loan that's gonna be affected by those high-interest rates. So it's just being aware that that exists as well. I mean there's pros and cons to both of them. You've gotta figure out what's gonna be right for you. And what the banks are prepared to do for you. But it's just being aware that you've got that as well. Particularly if you're someone that's like the thought rising rates and stuff is getting that anxiety. Well, you can actually avoid that. You're gonna be paying a bit more, but that's the price of that certainty, I guess, while you still can keep some flexible or just lock it all in, whatever, whatever you like, but just being aware that you've got that as an opportunity

Mel: I'm really cautious with locking it all in simply because it means you often can't have an offset, you can't make lump sum payments, so you really restricted. So if you really want that certainty, you might look at a half half where it's, that you're hedging your bets if you like. Still has some variable, some fixed, but the other thing you could do, so if you were really worried about it and, and what we just say, it was 4.2. You could simply start paying your loan off at 4.2%, which is where we talked about that extra one to 3% with all that extra going into the offset so that when rates increase, you're already doing it. So you are kind of becoming your own fixed rate loan if you like regardless of what rates are doing. And that's the thing that we have been talking about for quite some time. So if you are already doing that, if you're already paying that extra 2% above you might think, well, why would I pay a premium for doing something I've already done when by paying more, I'm gonna be building a buffer. And, yes, I've got a little less certainty, but I've got the ability to put some buffer away. But as Lawsie said, if you just need that sleep at night factor, then sure maybe you might lock some of it in.

Lawsie: Yeah, definitely.

Mel: So to recap, you are going to see clickbait headlines everywhere. We are seeing so many of them. What I want you to do is start to talk back to them, or just stay off the news for a few days until they calm down. You are also gonna see a lot of stuff about falling property prices. There's a guy that says every year our property prices are gonna drop by 50%. They'll wheel him out, cause they do every year. So just be aware, this is coming. Will property prices fall in some areas? Sure. They could. Will increase in some areas? Sure, they could. If you are buying for the long term, if you're intending to pay your mortgage off and not default, it's kind of irrelevant. So just keep following that beautiful long-term plan that you've set in place for yourself and try to block out the noise as best you can. And if you don't have that beautiful long-term plan, there may be now the time to look at the My Financial Adulting Plan. Our doors open, when do they open Lawdog?

Lawsie: 15th of May

Mel: On the 15th of May. And then we close again for another three and a bit months. So now when all this uncertainty is happening is a beautiful time to have our heads on your finances and actually create. To understand where you are now and where you wanna be. To create your own financial, strategic plan, to understand about investing and habits and all those sort of good things. So if you are kind of on that fence where, certainly we are in a time of declining financial literacy, which is where these clickbait headlines can really affect people. So if that's you and it's simply financial confidence that you want or if you want real financial transformation, make sure. We'll put a link in the bio as well, but until then, hopefully this has calmed you down. It's given you a little bit of confidence and you have your homework now as to what to do. One to 3% extra into your offset, buffers, talk to your broker, ask for a cutting of your interest rates.

Lawsie: And stay away from clickbait headlines.

Mel: Exactly.

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