Budgeting For Interest Rate Rises
On Wednesday April 4, the Reserve Bank of Australia (RBA) decided leave the official cash rate on hold at 6.25%, saving homeowners the much anticipated 0.25% increase in variable mortgage rates. Many analysts are tipping the RBA is waiting on official March inflation rates before deciding on any increase and believe an increase is likely in May. www.news.com.au stated that “Higher rates are forcing people into financial hardship with a survey by NEWS.com.au and Coredata released today revealing almost one in three Australians would be forced to sell their home if interest rates rose by 1 per cent.” Furthermore, “Of property investors, 44 per cent said a 1 per cent rate rise would force them to sell their properties as mortgage costs got too much to service.” Take the following mortgage and see what happens when interest rates increase: Current situation Loan amount$400,000 Interest rate7.99% Loan term25 years Weekly minimum repayment$711 Total interest payable over 25 years$524,642 0.25% interest rate rise - Weekly minimum repayments will increase to $727 - Total interest payable over 25 years will increase to $544,588 – that’s another $19,946! - Additional amount required per annum to satisfy minimum repayment requirements will be $812 0.50% interest rate rise - Weekly minimum repayments will increase to $742 - Total interest payable over 25 years will increase to $564,706 – that’s another $40,064! - Additional amount required per annum to satisfy minimum repayment requirements will be $1,616
1.00% interest rate rise - Weekly minimum repayments will increase to $773 - Total interest payable over 25 years will increase to $605,445 – that’s another $80,803! - Additional amount required per annum to satisfy minimum repayment requirements will be $3,246 The Sunday Herald Sun reported on April 8 that “Battling families are using their credit cards to pay their mortgages in last ditch efforts to save their homes.” reporting one family that has accumulated approximately $160,000 in credit card debt on eight credit cards and that “charities and financial counsellors say there are thousands more - many just one interest rate rise from losing their homes.” All this talk about interest rate rises and the impact it is having on homeowners enforces the important of staying in control of your finances. Applying additional amounts to the mortgage repayments means families will need to cut back on other areas of spending to avoid the trap of financing their lives via credit cards which attract interest rates of approximately 20% p.a.. The best way to stay in control of your finances is to ensure you regularly complete a budget. Budgeting is the key to understanding how much you are spending and where you are spending your money - this is the first step to being able to save money. By regularly completing a budget you regularly understand where and how you plan to spend your money over the coming period. That way you can determine which areas of your spending can be better managed i.e. where you can save money which can be applied to those additional mortgage repayments. For those people who struggle with budgeting or don’t know where to start when it comes to budgeting, www.easy-budgeting.com can help. www.easy-budgeting.com has made the process of budgeting easy and possible for everyone. The web site offers a simple and easy to use 12 month budget model created in Microsoft Excel. You don’t need to be a computer wizard or an Excel expert, you just need to have the desire to control your finances. The main feature of the 12 month budget model provided by www.easy-budgeting.com is the ability of the user to budget an income or expense item by completing just 3 easy steps. The user simply selects the start month, the frequency and the amount of the income and/or expense and the data for the 12 months is automatically generated based on the parameters selected. After completing the budget and reviewing the 12 month summary and the expenses graph, users can easily determine where their money is being spent and where cut backs are possible. The budgeting process will help you identify your problem areas, take control of your spending and ensure you are better prepared to manage those inevitable interest rate rises. If completed regularly, budgeting will become second nature and you’ll find that your money will go further and work harder for you and your family. Visit www.easy-budgeting.com for more information on the 12 month budget model.
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