Mortgage Borrowers Dilemma: Spend or Save?

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Earlier this year, the Reserve Bank of Australia (RBA) announced that it would raise interest rates to battle the building inflation from the pandemic. But with the current interest rates, mortgage borrowers are getting hit.

Since May 2022, the RBA has raised interest rates seven times, and four of those directly impacted monthly mortgage repayments. This means that repayments have significantly increased. Commonwealth Bank of Australia (CBA) has the most significant number of mortgage customers, and their interest rates for repayments have risen by 2.39 per cent. In context, a customer with a $700,000 loan payable in 25 years now has to pay $1,140 per month.

Customers now face a dilemma, do they choose to cut back on expenses and apply their savings to the higher repayment schemes or utilise their cash buffers? But the RBA governor and treasurer both claim that most Australians can handle higher repayments thanks to lower unemployment rates and large household cash buffers.

To support this claim, CBA reports that 78 per cent of their home loan customers are ahead of their monthly payments by an average of three years, building up their cash buffers. Another factor that supports this is that inflation is slowing down.

According to Michelle Marquardt, ABS Head of Prices Statistics, “This month’s annual movement of 6.9 per cent is lower than the 7.3 per cent movement in September. However, CPI inflation remains high. It’s only one month’s data, though, and the monthly inflation figures from the ABS aren’t as statistically robust as the quarterly data.

However, the report published by the economics team in CBA noted that the country’s economy is in the hands of its shoppers. “Looking beyond the next few months, we expect a clear slowing in retail trade and consumer spending more generally. Rising interest rates and the roll off of ultra-low fixed-rate loans over 2023 and 2024 will place significant pressure on household budgets.”

The report added that lower consumer spending might help alleviate domestic inflationary pressures, suggesting saving on shopping over utilising cash buffers. RateCity’s research director Sally Tindell also offers tips to mortgage customers. Tindell recommends that customers be more informed of their loan structure and the current offerings and have a conversation with their bank to see about getting discounts or loan restructuring programs.

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