By anybody’s standards, 2022 has been an extraordinary year for the Australian economy. It certainly hasn’t panned out the way the RBA thought it would, with governor Philip Lowe’s March 2021 market commentary stating that, “the cash rate is very likely to remain at its current level until at least 2024.”
As it turned out, the cash rate underwent eight successive monthly rises, going from a record low of 0.1% in April to a 10-year high of 3.1% in December.
Why did this happen? What does it mean for the average person? And what can you do to minimise the impact as we enter the new year? Read on to find out.
Why did we have eight successive rate rises in 2022?
Several different factors combined to create the financial conditions we now find ourselves in. For one thing, the economy bounced back from the pandemic much quicker than expected.
While you’d be forgiven for thinking that this can only be a good thing, it meant that the stimulus measures put in place by the RBA (including those record low interest rates) kickstarted a wave of inflation which hit a 30-year high of 7.3% in September.
The cost of living has also been hit hard by factors such as the war in Ukraine and global supply chain issues. These have driven up the price of everything from food to petrol to electrical goods. And as if that wasn’t enough, consumer spending has remained high while wages growth has been slow. In short, it’s been a ‘perfect storm’ for inflation.
The RBA’s main weapon to combat this is by raising interest rates. To bring down inflation, you need to stop people spending, and to stop people spending, you need to make credit (such as home loans) more expensive. It’s a tough but proven remedy which is starting to show early signs of working.
What has it meant for the average person?
Everyone’s back pocket has been affected by cost-of-living increases, but those with mortgages have borne the brunt of it. To put this in perspective, someone with a $750k variable home loan is paying $1251 per month more than they were at the start of the year. And although those lucky enough to be on a low fixed rate (i.e., less than 2%) won’t have felt the impact yet, they will do so in increasing numbers as they roll off their fixed rate terms as 2023 progresses.
Can refinancing my home loan help?
It’s often possible to reduce your monthly mortgage repayments by negotiating a better rate, either with your current lender or a new one. Additionally, depending on the type of new loan you take out, you might benefit from extra features such as an offset facility or the ability to make extra repayments, both of which could result in you paying less interest over the life of your loan. For more information about these sorts of extra features, check out our ultimate guide to refinancing.
A major consideration when refinancing, particularly in the current economic climate, is whether to go for a fixed or variable rate. Because, although fixed rates are higher, they offer protection from further rate rises, which, as we have seen, can come about quite unexpectedly.
The potential downside, however, is that should rates start to decrease during your fixed rate term, you’d be locked in and therefore wouldn’t feel the benefit.
The fixed vs variable rate question aside, it’s important to understand that refinancing might not necessarily be in your best interests. For example, if you have less than 20% equity in your property, you won’t be able to refinance without paying LMI again.
Similarly, if your financial circumstances have changed since you purchased the property, you might not meet your lender’s credit requirements for refinancing.
If you are at all unsure where you stand on the above, it’s highly recommended that you speak to a home loan specialist or broker before making any decisions.
- For more in-depth information about refinancing, click here.
The good news
While higher interest rates are tough on mortgage holders, the good news is that there are several ways to help you pay down your home loan sooner such as offset accounts, free redraw, and the ability to make extra repayments without penalty.
All of the above are available to Great Southern Bank Home Loan customers.
And of course, the flipside to all this is that it’s a good time for savers. Higher interest rates work both ways, after all. Even if things are tight, you might be surprised at how much you put away by using our clever savings tools.
The Boost can help you top up your savings every time you use your Visa Debit card, while The Vault keeps your savings out of sight so you’re not tempted to dip into them.
And if you’re wondering where the best place is to put your savings, you might want to check out our article about the difference between term deposits and high-interest savings accounts.
Here’s to a happy new year!
Important Information
Great Southern Bank, a business name of Credit Union Australia Ltd ABN 44 087 650 959, AFSL and Australian Credit Licence Number 238317. Conditions, fees and charges apply. This is general information and does not take into account your objectives, financial situation or needs. Consider the appropriateness of the information, including the Terms and Conditions (T&Cs) booklet, before acting on it. The Financial Claims Scheme may apply to this product; refer to the T&Cs for more information.