rising interest rates Archives

Fixed rate mortgage expiring… Now what?

10 May, 20234 May, 2023 Updated on4 May, 2023 Budgeting, Economy, Finance

If your fixed interest rate expiry is coming up, you might have started to think about what happens next and what action you need to take. Or you might be sticking your head in the sand and avoiding the topic entirely. Be warned! The worst thing you can do is take no action at all. If your fixed interest period is due to expire, then it’s time for a review of your finances – Revisit your budget A fixed rate expiry will mean a change to what is often one of our biggest expenses – the home loan repayment. In a rising interest rate environment, this likely means a bigger expense you will need to allow for. By revisiting your budget, you can make sure you can afford the new home loan repayment amount, or adjust your spending where needed. Know your financial situation Your financial situation is going to impact what options are available to you and what options might be best for you. If there’s been recent changes to your income position such as job loss, income reduction or maternity leave, for example, this may impact your ability to refinance your loan. As a result, you may have to stick with your current lender on terms you may not be happy with. If you have surplus cash flow that you want to use to reduce debt, a variable rate loan might be more appropriate so that you’re not as limited with the ability to make repayments. Alternatively, if cash flow is tight, you might appreciate the stability of a fixed rate loan, and knowing your repayment amounts won’t increase during the fixed rate period. By having a good understanding of your current financial position and future goals, you can determine what your needs are and what the best strategy is for you moving forward. Look at what the market is doing One of the main factors to consider when deciding between a fixed and variable interest rate is the current market. While no one has a crystal ball, it’s important to consider what is happening with the economy, housing markets and interest rates. Are interest rates trending up or down? And what might this mean for both fixed and variable interest rate loans? Get clear on your options When your fixed interest term expires, you will need to choose between either re-fixing your loan for a period or switching to a variable interest rate loan. This is also a good opportunity to review your existing loan provider against other loan providers, to ensure you are being offered a competitive rate. With your market research in hand, it’s time to call your existing lender to request a rate review. You can let them know you are considering refinancing your loan and want to know what the best they could offer is. It might be time to switch lenders if they’re not prepared to offer you a competitive rate. The information provided in this article is general in nature only and does not constitute personal financial advice.

The effect of rising inflation

3 August, 202227 July, 2022 Updated on27 July, 2022 Budgeting, Economy

The word ‘inflation’ doesn’t only dominate business news headlines but finds its way into general news reports too. So, what is inflation and how does it affect you? In simple terms, inflation signifies a rise in the price of goods and services, meaning you pay more for every purchase you make. Does the US influence Australia’s inflation rate? It is not a surprise that countries in today’s world are more connected than ever before. Therefore, a rise in US inflation rates will impact the Australian economy too. However, the degree and timing of its impact will vary. For example, a rise in labour costs in the US may have a limited impact on Australians; however, an increase in the price of iPhones or Nike shoes in the US will reflect in their price in Australia too. What will be the impact of rising US inflation on Australia’s economy? Interest rate movements made by the US Federal Reserve Bank (the Fed) are closely monitored by central banks worldwide, including the Reserve Bank of Australia (RBA). Over the past decade, many developed economies, including the US and Australia, have reduced interest rates to boost their economies. With rates rebounding from all-time lows there is an expectation that rates will continue increasing due to the strong performance of those economies. Quite often when the Fed increases its interest rate, Australia is quick to follow suit. The cost of borrowing funds will increase, leading to a rise in the inflation rate, making goods and services more expensive. Rising inflation rates can also negatively impact the Australian dollar, where one AUD buys less USD than it may have done previously. What will be the effect on investors? A rise in inflation affects investment markets negatively due to higher interest rates, volatility in the economy and uncertain share prices. For some investors, rising interest rates mean paying more interest on their home loan, which reduces their disposal income and, in turn reduces their capacity to invest. For retirees, an increase in the price of goods and services at a time of share market volatility can lead to having to sell more of their investment assets (potentially at a loss or reduced profit). Also, there could be uncertainty in dividend income, which many retirees often rely upon. Retiree investors will have fewer years to recover from a drop in their portfolios compared to younger investors. How should you prepare for a rise in inflation? It is important to first analyse your personal cashflow situation to understand where your money goes. Consider fixing at least part your home loan to limit your exposure to rising interest rates. Reconsider new personal loans, such as car loans. Do you need to take on new debt when interest rates are likely to increase? For the risk-taking investor, it can be tempting to invest more money into shares when prices are falling, but always consider averaging your position to avoid market timing risk. For investment purposes, consider having exposure in well established companies “blue chip stocks” vs riskier stock. Investors often find comfort knowing their funds are exposed to good quality companies with strong balance sheets. If the thought of rising inflation leaves you feeling unsettled, be sure to talk to a professional adviser. Your adviser will review your financial position, your ability to meet your financial obligations, as well as identify strategies to outpace inflation. The information provided in this article is general in nature only and does not constitute personal financial advice.