Curbing inflation: Why borrowers should watch their pennies this Xmas

With the latest cash rate increase of 25 basis points – the seventh in as many months – one of the nation’s most awarded mortgage brokers believes borrowers need to rein in their spending this Christmas to fight inflation. While the cash rate rises have been moderating, we all have a part of play to help control inflation. If we want interest rates to come down, then we all need to do our bit to help reduce inflation, including reining in spending where possible.

Why is inflation still a threat this Christmas season?

Inflation is still far too high and with the holidays approaching, I am worried that people will splurge money they don’t have on presents, which will add further pressure to inflation into next year. The rapid increase in interest rates is still clearly starting to hurt some borrowers, so it would be a sound idea to try to be a bit more moderate these holidays given that mortgage repayments have risen so sharply for people with variable home loans.

Three percentage point buffer

More and more potential borrowers were also not passing finance servicing assessments because of the three percentage point buffer being applied to mortgage applications.

Prior to the announcement, mortgage applications were required to service using interest rates of between 7.29% to 7.54% for variable loans, which is much higher than the interest rates on the actual loans and is causing problems for many potential borrowers.

Fixed rate home loans were being assessed against interest rates of between 8% and 9%, which is crazy given borrowers can still secure fixed home loans at in the 4% range. Unless we get inflation under control, these are the sorts of interest rates that are going to be used to assess home loan applications, which are likely to drag down property prices further.

Inflationary pressures are temporary

It was vital for borrowers on fixed rate mortgages due to expire in the second half of next year not to panic. It does appear that some of the inflationary pressures are temporary, so we may well see interest rates moderating earlier than predicted. I have been receiving calls from borrowers who want to refinance now even though their fixed rates mortgages are not due to expire for a year or more and the rates on offer now are just off the charts.

It’s vital that all borrowers adjust their spending so they can manage current and future mortgage repayments, including watching their pennies, if possible, this holiday season.

Louisa Sanghera is 2021 Australian Mortgage Awards Independent Broker of the Year and Zippy Financial Director and Principal Broker.