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  • First National Real Estate

How to make the most of your budget within a higher interest rate environment


Rising interest rates are a scary prospect for many Aussies, especially those with a mortgage, but it may be reassuring to know that the average borrower is ahead of their home loan repayments. Data from the Australian Prudential Regulation Authority (APRA) has shown that the average borrower is 45 months ahead of their repayments, a figure which has increased from 32 months prior to the pandemic. Furthermore, those with interest-only repayments are an average of 52 months ahead.

With everyone stuck at home and fewer opportunities to spend money, the pandemic generally created positive saving opportunities. The numerous lockdowns imposed around our country encouraged many Aussies to grow their savings and consequently, $50 billion has been added to offset accounts. In combination with low-interest rates and government support, this has placed borrowers in a good position when it comes to their home loan repayments.

Being ahead of your repayments will protect you from future rate rises by providing a buffer; and if you pay off your mortgage sooner, you’ll pay less interest and build up more equity. While it’s pleasing to know that many people are ahead of their repayments, this simply isn’t achievable for everyone.

Although positive in theory, the reality is that home loan repayments are a burden for many Aussies and the increasing interest rates are not helping. With interest rates inevitably rising, here are a few ways to cope with your repayments and manage the household budget within this higher-rate environment. Utilise an offset account One way to reduce the amount you pay on your mortgage over time is to place savings into an offset account. This will reduce the amount of interest paid on your loan as the balance will offset the principal loan amount, meaning you won’t pay interest on the difference. An offset account is especially useful with the rising interest rates, plus there are tax benefits. Renegotiate your loan Refinancing your mortgage can help you save on your home loan and pay it off sooner with a lower interest rate. Shop around to find a rate that works for you and suits your financial situation. Make extra repayments If you’re lucky to receive a generous tax return or bonus, putting some or all of it into your mortgage will help make a difference in the long run. Alternatively, if you have the financial means, consider making repayments every fortnight rather than once a month. This equates to an additional two payments throughout the year as there are 26 fortnights and 12 months, helping you pay off your mortgage earlier. Budget with common monthly expenses Increase your income With the threat of rising interest rates looming on the horizon, additional income provides added security when it comes to tackling increasing living costs. If you can find extra time, consider investing your time in a side hustle, or altering your working situation by either switching to a higher-paying role or increasing your hours. Reduce discretionary spending Your budget might be tight now with the cost-of-living soaring, so one measure to reduce your expenses is to monitor your outgoing costs. Limit your discretionary spending by using public transport, cooking meals at home, holidaying locally, and going out less often. While potentially less appealing, these options may be necessary while we endure the current economic situation.

In times of uncertainty, it’s important to plan and build strategies to make sure you feel more in control of your money. When it comes to your mortgage, putting money into an offset account or making additional repayments with a refinanced loan may reduce your payments in the long run. In daily life, it might be beneficial to reduce your discretionary spending or alternatively increase your income to combat the rising costs of daily life we are currently experiencing.

Adopting some of these strategies might help you to feel a little more financially secure and reassured. As we face rising interest rates and living costs, it’s important to remember that this difficult economic phase will eventually pass, as they always do. DISCLAIMER The following advice is of a general nature only and intended as a broad guide. The advice should not be regarded as legal, financial, or real estate advice. You should make your own inquiries and obtain independent professional advice tailored to your specific circumstances before making any legal, financial, or real estate decisions.

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