Why Budget?

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 situationLoan amount $400,000
Interest rate 7.99%
Loan term 25 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.