A four-step coping plan now interest rates might stay high

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Fresh off a higher-than-expected monthly inflation reading and sombre minutes from last week’s Reserve Bank meeting (the first under new governor Michele Bullock), murmurs are getting louder that rates may not be on the way down anytime soon.

Crucial will be the quarterly inflation reading – which is considered more indicative than the new monthly one that came in at 5.2 per cent from 4.9 per cent – at the end of this month.

Murmurs are getting louder that rates may not be on the way down any time soon.Credit: Peter Rae

However, with one of the big four banks now predicting the next rate move may even be a rise, it’s time to be alert but not alarmed.

And it’s also time to act. Your coping plan has four prongs:

1. Stop paying too much tax. If you didn’t do it at the beginning of the financial year, it’s time you undertook a quick tax audit. Far too often, I see accidental, avoidable mistakes that cost people dearly. There are two main ones.

First, so many people waste money by copping the Medicare levy surcharge rather than having actual hospital insurance. If you are going to pay the penalty, you may as well get the protection. 

Right now, the priority may be short-term financial survival, rather than long-term forging ahead.

This year, you will be slugged with the surcharge of up to 1.5 per cent of your assessable income if you earn more than $93,000 as a single or $186,000 as a couple.

A second, scarily common way people donate money in extra tax is holding savings in a deposit account, therefore forgoing some interest in the form of tax. The far-smarter alternative is usually to house savings in an offset account alongside your mortgage if you have one.

By doing so, the effective earnings are tax-free. They will also be more – mortgage interest rates are always higher than savings rates.

2. Go skinny on spending. Yes, I have a wry smile on my face as I type this because there is barely one of us who hasn’t already trimmed the obvious financial fat. With cost increases across almost every need and want in our lives, the very cause of those interest rate rises, we have had little choice.

But getting super frugal where you can certainly yields good results at the pointy end of price spikes.

What else can you do that recreates your favourite indulgences inexpensively inside the house? How can you cut your kid costs? There may still be some (relatively) painless ways to save.

3. Get all the help you can. Did you know you can pay your council rates throughout the year, with no loading? In fact, as I wrote recently, why would you ever pay them upfront?

Unfortunately, most of the other providers in your life will charge you a loading if you ask to do the same. And often it means paying in advance, not ‘as-you-go’, so you essentially give them your money early.

If you are in trouble though and the money just will not stretch, every provider needs to cut you some sort of slack; each has financial hardship departments charged with doing just that. And logically, they want their money in some way, shape or form.

The amazing network of free financial counsellors available through the National Debt Helpline (1800 007 007) will even help you broker such arrangements.

4. Start to bank the banks’ interest. Refinancing your mortgage has been the main financial game the past year.

This is because the differential between the Reserve Bank’s published average discounted variable rate and the best-value comparable rate in the market is now 137 basis points. The Reserve Bank’s stated rate is 7.06 per cent while the most competitive is 5.69 per cent.

But do you know what that looks like in real-world terms? On the average $593,475 mortgage, it’s a saving of $505 a month. That’s from the bank and for you. And remember, the hurdles you have to clear to qualify for a new home loan are suddenly lower. 

Still on the interest front, you can probably secure similar savings on any other loans you hold, too.

Have credit card debt as well? Then the smart strategy here is to park it at 0 per cent interest for a period of up to 34 months via a balance transfer to a new institution. Buy (free) time.

I don’t usually say this but right now, the priority may be short-term financial survival, rather than long-term forging ahead.

Nicole Pedersen-McKinnon is the author of How to Get Mortgage-Free Like Me. Follow Nicole on Facebook, Twitter or Instagram.

• Advice given in this article is general in nature and is not intended to influence readers’ decisions about investing or financial products. They should always seek their own professional advice that takes into account their own personal circumstances before making any financial decisions.

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