We’ve officially stopped counting the hikes to interest rates since they began in May 2022, with the average variable mortgage rate in Australia now sitting at around 6.24%. Some are already living with higher mortgage repayments but there are thousands who are yet to adjust to these much higher rates.
So what do you do if you’re one of the ones in the very real situation where your fixed rate is rolling off and you’ll be facing a much higher variable rate?
Well there are 880,000 loans (and their owners) in the exact same boat. So let’s take a look at the below plan of attack.
Australian Mortgage Rate Average, Feb 2023
First things first: don’t panic.
Interest rate hikes are a normal part of the economic cycle, and while they can be stressful, they are not the end of the world. However, it is important to take some practical steps to prepare for this change.
The first thing to do is to assess your current financial situation. Dust off that old budget spreadsheet and have a good look at your expenditure. See where you can make some cuts to help you prepare for the higher payments. If you don’t have one, now is the time to get it together.
You’ll want to focus on three things:
- Lowering fixed expenses – time to review all your household insurances and subscriptions to look for cheaper options and better deals
- Reducing variable expenses – how can you reduce your electricity and water bills? If you’ve ever balked at a 3 minute timer for your shower, this might be the time to explore cost savings that add up in a big way over time.
- Pausing those ‘nice-to-haves’ – it’s not forever, but sometimes you need to go back to basics for a while to stabilize your cash flow whilst you adjust to higher fixed expenses (like a fixed rate mortgage reset)
This is also a really good time to review any debt you may have and see if there are ways to pay it down faster.
If you’re looking to pay down debt faster but don’t have the extra cashflow to make additional repayments, there are a few strategies you can try:
- Refinance your debt: Refinancing your debt can help you lower your interest rate, which means more of your payment will go toward the principal balance. You can look into options like balance transfer credit cards, personal loans, or even refinancing your mortgage to help you save money on interest and pay down your debt faster.
- Consolidate your debt: Consolidating your debt means combining multiple debts into one loan. This can simplify your payments and may also help you lower your interest rate. You can consolidate debt through a personal loan, a home equity loan or line of credit, or by working with a debt consolidation company.
- Utilize balance transfer credit cards: If you have credit card debt, you can consider taking advantage of balance transfer credit cards, which offer a promotional 0% interest rate for a limited time. This can help you pay down your balance faster, as more of your payment will go toward the principal balance.
- Negotiate with your creditors: You can try negotiating with your creditors to see if they will reduce your interest rate or allow you to make smaller payments for a limited time. This may help you pay down your debt faster and also reduce your overall interest charges.
- Automate your payments: Set up automatic payments for your debt to ensure that you never miss a payment and incur late fees. This can also help you pay down your debt faster, as some creditors may offer discounts or lower interest rates for customers who make on-time payments.
Keep in mind that paying down debt faster without making additional payments may not be as effective as making additional payments, but it can still be a helpful strategy to help you save money on interest and pay off your debt faster that way.
Next, you’ll want to review your current financial products and see if they are still the best fit for you. If you have a mortgage with a fixed rate that is about to roll off, you may want to consider refinancing to a new fixed rate or a hybrid option. This can help you lock in a lower rate and make your payments more predictable.
If you do decide to switch to a variable rate though, make sure you understand how the rate is calculated and how often it can change. This will help you plan for any potential changes in your payments.
It’s also important to be proactive and stay informed during periods like this. Keep an eye on economic news and announcements from the central bank, as this can give you a sense of when, how and by how much, interest rates may be changing.
You don’t need to become an economics enthusiast to keep tabs on interest rate movements and the knock on or downstream impact to households like yours. But staying informed can help you make better financial decisions when you need to make them.
If you’re working with a financial coach or a financial advisor, make sure you have regular check-ins to review your cash flow and goals and make any necessary adjustments.
Lastly, don’t forget about the emotional side of this situation. Financial stress can take a toll on your mental health, so be sure to take care of yourself.
Lean on your support system, practice self-care, and remember that this is a temporary situation that you can handle.
When it comes to making important decisions, don’t make them in the heat of the moment or on impulse. Taking your time to make an important decision can really help to reduce the negative impacts of cognitive and emotional bias which can mean we may not be making the best financial decision for our circumstances.
In conclusion, facing a potential interest rate hike can be daunting, but with preparation, guidance and a level head, you can manage it successfully.
Take the time to assess your finances, review your products, and stay informed. And don’t forget to take care of yourself along the way.
If you need any additional guidance, don’t hesitate to reach out to your MoneyHappy coach for advice if you find yourself in this situation and in need of a sounding board, a support system or financial guidance.
