At the risk of been tagged as a stereotypical accountant, I was fascinated by economics from an early age. What interested me is the economy we operate in is essentially behaviourally driven, determined by the day-to-day choices people make.

Currently, interest rates – especially the speed with which they have increased recently – are impacting some people and the choices open to them.

Circa 12 months ago, interest rates were less than 3%; now you are lucky if you can lock in a fixed rate at lower than 6.5%. 

Approximately 50% of fixed loan mortgages are due to refinance in the next 6 months, with most of those mortgage interest rates likely to at least double. 

For example, a $500,000 mortgage at 3% equates to an annual interest cost of $15,000 per annum, whereas a $500,000 at 6.0% equates to $30,000 per annum. This means the borrower having to pay an additional $1,250 of interest per month ($288 a week). That’s a lot.

If you are one of the 50% of fixed mortgage rate holders about to refinance, then you need to be thinking about how you are going to cover such an uplift in interest expense sooner rather than later. If you leave it too late the options tend to be more limited.

So, what options exist? I have been working through this with clients recently, with the following options being considered/implemented:

1.  Budgeting / Cost Reduction: If you are going to need to pay a further ~$300 a week in interest as per the above example, then now is the time to have a good look at your spending habits and work out what can be cut from your daily spend/budget to bridge this gap. This may require you to make some material sacrifices for a period of time, but the sooner you look at where you can and can’t reduce spending the better prepared you will be for dealing with the increased finance costs.

2. Sell Assets to Reduce Debt: If cutting back on day-to-day costs isn’t an option and/or won’t cover the full uplift in interest expense, then you may need to consider selling some ‘luxury’ items around the house or garage to reduce debt and thus the interest expense you need to pay.

3. Additional Income: With unemployment at record lows, you may also want to consider picking up additional hours/income to cover any shortfall.

4. Downsizing: An absolute last option, but if after assessing the first two options you still are going to struggle to meet your finance cost obligations, then this may need to be considered.

Judging by discussions I have recently had with people, not everyone is aware of the material increase in finance costs they are about to need to service when their fixed mortgage rolls over. 

If you fit into this bracket, now is the time to carry out a ‘warrant of fitness’ on your financial position and look to put a plan in place. If you need help, contact your accountant or financial adviser who will be able to assist.