Australia's Interest Rate Tsunami

Feeling the pinch of the Reserve Bank of Australia's recent interest rate hike to a whopping 4.35%? Wondering how this surge will hit your wallet in terms of everyday spending, inflation, and fixed costs like rent? Join us as we delve into the nitty-gritty of this significant shift, examining the stark contrast in loan sizes and repayment amounts from a year ago compared to now. We will discuss the impact on households and contemplate whether this new norm is truly affordable, especially when so much of the income is siphoned off toward repaying a mortgage. 

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The advice shared on The Finance Bible is general in nature and does not consider your individual circumstances. The Finance Bible exists purely for educational / entertainment purposes and should not be relied upon to make an investment or financial decision. If you do choose to buy a financial product, read the PDS, TMD and obtain appropriate financial advice tailored towards your needs

Transcript

Zeke Guenthroth: 0:08

Hey guys, welcome back to another episode of the Finance Bible podcast.

Oscar Don: 0:12

We are your hosts, as always, oscar and Zeke, and please note that nothing in this podcast should ever be considered as personal financial advice.

Zeke Guenthroth: 0:21

And if personal financial advice is what you are after, then please get in touch so that we can connect you with the correct professionals to make sure that the job is done correctly. Enjoy the show. Today we are just going to be talking about the interest rate. Currently it has gone up to 4.35%. Don is actually in Sydney at the moment. The internet in Sydney, as we know, can be a little bit give and take. Optus likes to run amuck, apparently. Great news, I am not in Sydney, my internet is working, but Don welcome.

Oscar Don: 0:58

Thank you as always. Yes, I am in Sydney and literally the first couple of hours getting the Lapierre. We have already had to close this recording once because the audio just doesn't work, but let's just hope we get a bit of stabilisation for this one Cup day. The other week or this week actually, on Tuesday there was a great horse race but also a not so great announcement by the RBA. It was the first move under the new leadership of Michelle Bullock, raising the cash rate by 0.25% to now being 4.35%. How do you feel about that? You did mention that you thought this was going to happen, but how do you feel about what? Do you reckon the factors of the increase actually were?

Zeke Guenthroth: 1:52

I mean, firstly, how do I feel about it? I think it's a little bit unnecessary, to be honest, For those dodgeball fans out there. I know you've got a good count of that about things being sterile and you liking the taste, but that's not what we're talking about here. So basically, I think it wasn't really necessary. The rate rises that we've had are pretty high. We've gone from a 0.10 back in I think it was May 2022. We're now at 4.35, about 18 months later.

Zeke Guenthroth: 2:20

The difference that that has on people and the impact that has I'll get into in a moment. But what do I think contributed to it? I think a lot of people are still spending. I think fuel going up so much is kind of a fixed cost that everyone does have to pay if they're driving. I think that's something that, regardless of what pressures we have on us and what interest rate rises they do, the people are still going to have to pay. That contributes to inflation.

Zeke Guenthroth: 2:43

You've got other things as well going on. When we're lifting the interest rates, investors and homeowners and stuff like that that might have a tenant or they might have someone housing with them they're going to bump up the rent because the payments are higher. Then bumping up the rent increases the spending of the people living there, which in turn contributes to inflation again. It's kind of a double-edged sword when you do that. I think at this point in time, Black Friday coming up, got Christmas coming up. January is a big holiday time for everyone in Australia probably all around the world, to be fair so there's a lot of different things going on in the market at the moment. I think all of that's a contributor. They might be making a bit of a statement saying don't go to nuts during Black Friday, Don't go in excess during Christmas and chill out a bit in the holidays. Don't be a nutcase.

Oscar Don: 3:28

You should listen to that mate. Don't be a nutcase over Christmas, because normally you are in that period. I will say there's lots of words.

Zeke Guenthroth: 3:40

I will say man is currently sober and I've toned down a little bit on the drinking side of things. I think it's going to be a nutcase over Christmas. We'll have to wait and see.

Oscar Don: 3:52

Just clarifying for everyone out there. When Zeke said he's currently sober, he wasn't an alcoholic, he just used to enjoy drinking on the weekend. But that's a big milestone, thank you. But I also think Shell Bullock's first kind of main announcement in the role I think having the rate rise is also showing that she wants to make a stance saying that yes, I'm going to increase the cash rate, but I do think this is probably one of the last hikes we will have. Are you the same with that, mate? What do you reckon? A few more hikes coming down? What do you think?

Zeke Guenthroth: 4:30

I think it will stay stagnant for a little bit until we get through the period where it is very expensive in the year. I think that come maybe February, march kind of thing, we might see a little drop. I hope to see that anyway. The reason being is basically we were at the lowest we've ever been in history. Right Like May 2022 is 0.10. That's very, very low. So the average loan size in Australia is roughly $580,000. So if you were sitting on that kind of rate at that point in time, then you would have been paying. You would have been paying about $1,445 per month or weekly, $334 per week how good would that be?

Oscar Don: 5:15

take me back to those days or $17,400 per year you did take advantage of those days buying your first investment property.

Zeke Guenthroth: 5:24

Absolutely so. Yeah, they were. They were good days and that was very affordable like $17,400 a year absolute bargain Whereas now we're at the highest we've been in. In what 12 years, I think, don't quote me on it. Per week You're paying 668, which is a literal double. Per month about 2,900 again a literal double and Per year, about 35 grand give or take, which is again a double. So it's going up a hundred percent. Yeah, if the difference in that is about 17 grand per year, how much money were you able to spend on other things back Only a year ago? One year ago, you had an extra 17 grand per household that you could spend on things, and it's now going to repaying a mortgage. Is that affordable for everyone?

Oscar Don: 6:13

I know a lot of people that can't sit there and magically whip another 17 grand out of their tukas and go ahead and pay that probably 80% of the population can't do that because especially families with kids school fees, you know, get extra curricular activities that extra money at the end of the day is Is basically impossible for some families. So this rate rise is just going to impact a lot more people. Especially the Christmas time coming up, it is probably their worst nightmare. I mean especially also if you lost, lost your bet on the Melbourne Cup, because you could have put a bet on Assuming the rate rise is going to happen, hoping to, you know, look after your mortgage repayments. But if you lost like a majority of us do I do I do tough luck.

Oscar Don: 6:59

But the good news is we have done a post about a few different ways how you can Possibly help yourself through the current cash rate hike. One of the main ones is which a lot of people are doing. You know, mortgage brokers we work with have told us this as well. A lot of clients are calling up their brokers, their banks, trying to just See what they can do for their interest rate. It doesn't hurt just calling up and asking if there's any way they can reduce it or even restructuring the loan, because this is the time when it may come into handy the most, especially for those families and Individuals who are really struggling and a lot of people as well because of this having to sell their properties. So for investors it actually may be quite a good time to jump into the market for some good properties and also help you with the tax side of things, which we'll go into a bit later.

Zeke Guenthroth: 7:59

For I mentioned a couple of different things you should be doing, which is pretty similar to what don said. Firstly, I want to highlight the difference over a 30 year loan term, which I think is absolutely absurd. The banks are having the best time of their life On the 0.10 back in May 2022. Over a 30 year loan term, your total interest repayment would have been roughly 41 grand, using that 580 Thousand dollar loan example. So 40 grand of interest, that's absolutely bugger. All right.

Zeke Guenthroth: 8:31

I mean 40 grand is a lot of money, but in comparison to now, where it's 422 thousand dollars of interest over a 30 year loan term, it's a thousand percent increase. That is absolutely cool. But yeah, what, what can you do? I mean the two first things that I would be doing Same as Don. I'd be calling the bank and saying, hey, please, do me a better rate, please, please, please.

Oscar Don: 8:59

I'll do anything.

Zeke Guenthroth: 9:01

Big and plead. But the second option is Call up your mortgage broker or professionals like ourselves and say, hey, here's the rate I'm on, here's my loan, here's a breakdown of my finances. Is there a possibility that I can refinance my debt to another lender and get a better rate? Chances are. You certainly can in this market. I'd say in the last 15 years it's never been more important to take those two steps today.

Oscar Don: 9:28

And that also comes back to having the right professionals in your corner who are proactive with that. So if you have a mortgage broker or a professional like ourselves and obviously that's in the rate rise if they can call you before you've taken the time out of your day and calling you and say, hey, this has happened, this is what we can possibly do. That's someone you want to be with for your professional journey in the investing and the home loan space. So financing the right team is vital. Another you mentioned refinance. You mentioned speaking to the broker If you don't have enough money to pay your repayments.

Oscar Don: 10:07

Now what about if you jump into a side hustle? Can be any form of side hustle, whether it generates 50 bucks a week to 150, 200 bucks a week. Could be Uber Eats. Could be a bit of Uber driving, literally whatever it is, just selling off marketplace. Every cent and every dollar will help you in times like this if you are struggling. So it may mainly be like a one to two hour shift on Uber Eats a week, but something like that will give you an extra 100 bucks a week to put towards your mortgage repayments if you are in the position that you can't actually really afford it. So you've got to kind of think outside the box and think of what you can do, as opposed to being a bit upset with the recent news, because there are a lot of different factors out there for side hustles.

Zeke Guenthroth: 10:57

Yeah, side hustles are very important to do in a time like this. Get into them. There's so many out there, like Dom just said, stuff like menu logging and all that I just have to jump in there for myself.

Oscar Don: 11:08

You may find me doing a bit of Uber Eats. One day a week I might be dropping off some grilled burgers to your doorstep just to get some extra cash coming in, because why not? You may as well. Is that what you're saying sometimes?

Zeke Guenthroth: 11:21

Yeah, occasionally you'll catch me doing it too, and what a pleasant surprise that would be. Mind you, you go to the door to get your food and it's done. Alright, what a day. Before we move on, I just want to clarify as well, in those calculations I was doing earlier in relation to how much you would have been repaying based on the cash rate, please note that that is based on the actual cash rate Obviously, banks' interest. They add stuff on top of that, like they weren't doing 0.10% loans in May. The interest difference, which is the actual important part of what I was saying, is what it is. I just wanted to clarify that and make sure no one was out here thinking that people were actually getting loans at 0.10%.

Oscar Don: 12:04

It is what it is, what it is what it is.

Zeke Guenthroth: 12:08

Oh, I better jump on. It is what it is, because he who is who he is.

Oscar Don: 12:16

That's a good line. Another way, it's a perfect line. There may be a plan in the background you may hear or you may not hear, which is fine. But another factor is you can also look to purchase and investment properties bizarre as that may sound for some people, but this can really help you with your mortgage payments, offering possible positive cash flow properties, a bit of annual tax aid, boosting your spare change. So this can help pay down your home quicker, get a bit of a tax refund at the end of the year and ultimately build your asset base as well.

Oscar Don: 12:48

So something to think about if you are looking for a capital growth strategy which you want to sell down the track to extinguish some debt, or more of a cash flow strategy for future and just building that up for retirement. But that can help people who are in a position to use possible equity in their existing home or have a bit of savings if you haven't gone into the home or the property market yet. It's a couple of different ways to look into the investment property realm and obviously everyone's different, so personalized strategies are a must. But generally speaking, if you find the right property and it works for you and your cash flow, it can definitely help you with these mortgage repayments.

Zeke Guenthroth: 13:33

Yeah, especially those people in the higher income brackets for the investment property thing, because a tax will help you a lot. In a time like now. Any money you can get is good money, it's money you need, it's money you want. So if you can reduce tax and have more money to pay that mortgage or to make sure you're not stressed day by day, that's something you should think about. I think that's about all for today.

Oscar Don: 13:58

Yeah, that's it, short and sharp episode. I just want to take the moment to give a quick shout out to Council Bluffs in Iowa. We have seen quite a few listeners have actually come from Iowa in the last month and a half. So, thank you. Whatever you're doing out there spreading the finance Bible word, thank you. Thank you Wherever you are in the world listening to this. Thank you. Make sure, if it is on Spotify or Apple Podcast, you subscribe to it and give us a rating, because the more subscribers, the more ratings, the better guests we can actually get on these podcasts, and the better guests we get on the podcast, the better the show is for you. So make sure you do that. Spread the word. If this podcast episode may help someone you know who is struggling with the current rate hike, send it to them and give us a follow on Instagram if you've got that platform as well.

Zeke Guenthroth: 14:54

All right, perfect. Catch you all next time.

Oscar Don: 14:56

Ciao.

Zeke Guenthroth: 15:12

Guys, as always, if you'd like to podcast, please give us a review. Jump on that five-star wagon, share it around with your mates and just give it the big, odd tick.