LIFESTYLE
Written by David Koch for Toyota Finance
That’s caught your attention, hasn’t it? But before you hurl abuse at me, or think I’m crazy, I want you to think about the facts. And then we’ll look at a few strategies to minimise the financial impact of rising interest rates on your household budget.
Having said that, you don’t have to worry about your current Toyota Finance car loan as for the life of the loan, the interest rate and repayments are fixed which is great and allows you to manage your finances better because you know what to expect every period.
David Koch is one of Australia’s foremost business and finance commentators as well as being Executive Chairman of his family business Pinstripe Media and the Ausbiz business and investment streaming network. Alongside his roles as co-host of Sunrise and President of Port Adelaide Football Club, David has been a small business owner for 30 years. He and Pinstripe Media have been creating inspirational small business and personal finance content for the past 15 years that has helped improve the lives of all Australians.
But back to my point about rising interest rates being good news. Our interest rates were slashed to record lows to protect us and the economy from the devastating financial impact of the COVID pandemic. It was the biggest threat to the economy since the Great Depression in the 1930s … It was that serious.
So to protect us from massive unemployment, the Federal Government launched their rescue package, which included the JobKeeper and JobSeeker programs, and the Reserve Bank slashed interest rates to cut our loan repayments and put more money in our pockets.
It was exactly the right thing to do otherwise the financial hardship would have been devastating. It kept people in jobs and businesses afloat.
But it couldn’t last as the world got back to normal. Interest rates have to get back to normal otherwise all this extra money in the system would lead to a big spike in inflation. Sound familiar? That’s exactly what is happening now.
If interest rates were still at record lows now, it would mean the economy was still in trouble - that jobs were being lost and businesses going broke.
See- rising interest rates can be good news for the economy! A strong economy means unemployment rates are low and businesses are strong.
But it means loan repayments have gone up and borrowers need to find the extra cash to put in now. A silver lining is that savings rates are also, thankfully, going up after being woefully low for so long.
Overall, Australian households have never been asset-wealthier on the back of rising property values, good superannuation returns and have typically had higher balances in savings accounts over recent months. The problem is you can’t eat your house and superannuation or use that cash to add to loan repayments.
The reality is higher interest rates, coupled with inflation pushing up prices, means Aussie household budgets are stretched.
So here are six thought starters to help you cope with higher interest rates (remember though, your Toyota Finance loan is fixed):
First of all, it’s worth remembering that even though rates have risen in the last few months, you should expect further rate rises in the future. To be prepared, do a comprehensive household budget and work out where cuts to expenses can be made so you have extra cash to put toward loan repayments so you’re not too stretched in the months ahead. Also look at ways to earn extra income through a second job or turning a hobby into a side hustle.
Pay down expensive debt before it gets more expensive. Interest rates on outstanding credit card balances and variable personal loans are already expensive so make them the first priority to get under control.
Make your bank work harder… as a borrower and as a saver. No matter what you’ve borrowed money for - a house, a holiday, or a business -, ask for a discount on your variable loan from the bank; it’s a phone call to your bank explaining that you’re a good customer (even better if you have insurance, investments and credit cards with them too) and you want a discount on your loan’s interest rate. Did you know, new borrowers to your bank are offered a rate at least 0.5 per cent lower than you?
You can have the same conversation with your bank about deposits as well. It's worth making sure you’re getting the best interest return on your savings accounts and term deposits too because they’re also constantly changing.
Refinance your home loan to another financial institution. It’s not as difficult to refinance as you think. Most lenders have a digital app to apply for a loan and receive an approval in 10-30 minutes. It gives you extra ammunition when asking for that discount from your existing lender that you have an alternative in place. When it comes to savings accounts there is up to a 2 percent difference in interest rates between the highest and lowest offered.
If you’re a homeowner, think about fixing a portion of your loan…. as you’ve done with your current Toyota Finance loan. But if you decide to fix all or part of your loan now you may end up paying less in interest in the future as rates keep rising- You'll have to crunch some numbers to work out whether this is a good option for you. But take care to ensure the fixed rate you’re offered isn’t too high. Some bank’s fixed rates are already well over long-term interest rate trends, which could mean you end up paying more than you need to when rates eventually plateau.
Pay more than the minimum amount on your variable loans. The faster you pay off your loans, the less you’ll pay in interest. If you can try to pay off more than the minimum amount each month, you’ll pay off your loans sooner and save money on interest on the way through.
