Guess what? The vast majority of us reading this article have never experienced inflation.
Like, not at all. Not beyond the cost of bananas going up during a particularly rainy season.
The upside of this collective naivety is that many Australians are in the same boat — scrambling to understand *inflation* and what it means for our loan repayments, daily spending, and the overall wellbeing of our families.
Inflation and interest rate hikes… in a nutshell
In August, the Reserve Bank of Australia (RBA) lifted its interest rates for the fourth month in a row, taking its official cash rate to 1.85%.
Considering we reached an all-time low of 0.10% in 2020, this means SOARING repayments and fun times for anyone with a mortgage the size of Sydney.
The increase was the fastest rate hike in almost thirty years and was basically put in place to reduce demand for all of the things that are driving high prices: property, cars and even broccoli.
The problem is that for a $600,000 home loan over 25 years, an interest hike from 2% to 4% could mean up to $624 in additional repayments each month (or close to $7,500 per year).
That doesn’t just curb our spending on nice-to-haves, it threatens our ability to pay for essentials and many families are rightfully worried.
How did they do it in the past?
The last significant inflationary period was from 1980 till around 1990, so perhaps we should begin there.
“Thinking about when I was raising my own kids in the eighties, it’s not really a fair comparison. When I bought my first house in Sydney in 1981, home loans were four times the average salary. Now they’re nine times the average salary.
Even in those days, with an interest rate of 16 percent, we were better off. Most people also didn’t have the number of expenses that families have today. My kids didn’t do anywhere near as many after school activities as my grandkids. I just didn’t feel the pressure of those extra costs.”
– Rick, 68, father of four, grandfather of nine.
It's easy to look back on the past with rose-tinted glasses. But the cost of raising a family and owning your own home has risen faster than wages over the past 40 years.
How are people preparing for inflation today?
Inflation is tough and affects families in different ways.
“We took out a construction loan last year but we haven’t accessed any of the funds thanks to weather and supply issues. I am beginning to feel worried about how the repayments are going to affect us in this completely different climate.
This plus the totally real cost of groceries now means that we’ve begun cutting back on things like date night and school holiday activities. I actually feel pretty lucky that our entertainment budget is the only thing affected at this stage, even though it sucks.”
– Kate, 40, mum of two.
And coming out of a global pandemic has presented its own challenges.
“This is actually the perfect storm for so many families, including my own. Two years of lockdowns has exposed a lot of learning gaps in a lot of kids. It turns out that specialist tutoring for a primary kid is $140 per session, and we’re making some hard decisions about raw costs vs the value it actually brings to our son. In the past we might have booked it regardless.”
– Paul, 47, dad of two.
Compare Club's experts tell me they're experiencing a record number of refinancing enquiries. Many homeowners are trying to get ahead of the Reserve Bank.
“I called my broker almost immediately after the first increase in April to try to lock in a fixed rate at whatever I could get. I knew it would be better than the 3.5% [cash rate] that’s been projected. It’s not like my rate is great, but I do feel a small sense of security for the next few years.”
– Spiro, 48, single.
Affording higher mortgage repayments
Despite some rather dire forecasts, there are some common strategies that everyone — whether you’re single, raising a family, or looking forward to retirement — could consider to reduce some of the strain on the monthly budget.
1. Reallocate some of your nonessentials
No longer commuting into the office? Perhaps it's time to sell that second car.
Looking to trim your entertainment budget. Many Australians have already cut back on subscription services like Netflix or Binge.
It's a cliche you'll see from every personal finance advice column, but cutting down on those $4 coffees or preparing lunch at home for the week is often one of the first actions people take.
Nobody wants to get rid of the things that essentially make the day-to-day that bit more fun, but these smaller expenses often add up.
2. Consider refinancing
Home loan lenders often reserve their most competitive interest rates for new customers. That doesn't mean you should lose out.
Speak to your lender. Sometimes you'll be able to get your rate reduced with a simple phone call.
If your bank isn't playing ball, head to a mortgage broker and let them do the hard work shopping around to find a lender with a cheaper rate.
3. Be honest with your bank
Lenders really are ready to help people struggling to meet their repayments.
Before you default, talk to your lender about their hardship assistance offerings and how this can support you to catch up financially.
They may offer you a mortgage holiday or a period of interest only payments.
The bottom line
All the signs point to a tough 12 months ahead for homeowners as interest rates look se to continue rising.
it's never been easier to shop around. There's a range of non-bank lenders with very competitive rates while banks are offering incentives for people to stay.
Using a mortgage broker is one of the easiest ways to refinance. They'll do the research and put in the hard yards getting your application across the line.
