The chances of the Reserve Bank of Australia (RBA) lifting the official cash rate on Tuesday just increased dramatically after figures showed the cost of living jumped 5.1% over the past year – the highest annual increase in more than 20 years.

Economists around the country say the unexpectedly high jump in inflation means a May rate hike is now on the cards when the RBA board meets on Tuesday.

“Expect the RBA to start hiking next week. First hike should be +0.4%,” said AMP chief economist Dr Shane Oliver.

ANZ Bank meanwhile immediately called for the Reserve Bank to raise the cash rate to 0.25%.

“A cash rate target of 0.1% is inappropriate against this backdrop,” said ANZ head of Australian economics David Plank.

So what’s going on?

Cost of living – aka the Consumer Price Index (CPI) – rose 2.1% in the March 2022 quarter and 5.1% annually, according to Australian Bureau of Statistics (ABS) data released on Wednesday.

According to the AFR, market economists were tipping headline inflation to jump to 4.6% year-on-year, so this has smashed those expectations.

ABS Head of Prices Statistics Michelle Marquardt said a combination of soaring petrol prices, strong demand for home building, and the rise in tertiary education costs were the primary factors driving up inflation.

It’s also worth noting that the RBA’s preferred measure of inflation – underlying inflation – which strips out the most extreme price moves, came in at 3.7%.

That’s now well above the 2-3% target range the RBA has previously stated was a key measure for triggering a cash rate hike.

If cost of living is up, why would the RBA increase rates next month?

High inflation is bad because it means the real value of your money has dropped and you can buy less goods and services than you could previously.

High inflation also has a habit of getting out of control, because one of the drivers of inflation is people expecting inflation.

Economists would argue that raising interest rates now is a hit we have to take to ensure we don’t end up with runaway inflation (short term pain trumps long term disaster).

Higher interest rates cool inflation in a number of ways, but one of the main ways they can actually save you money right now is via the exchange rate.

If the RBA doesn’t raise rates, investors will likely decide they can get better returns elsewhere around the globe, thereby lowering demand for our currency.

And if Australia’s exchange rate falls, the cost of imported goods, including the oil you fuel your car with, would go up even higher.

So it’s a tough pill to swallow for mortgage holders, but inflation can get out of hand if left unchecked. Prime examples include high inflation in Australia in the 1980s, and more recently Zimbabwe.

What does this mean for your mortgage repayments?

Well, if the RBA increases the official cash rate on Tuesday, as many economists are now predicting, unless you’re on a fixed rate mortgage, it’s likely the banks will follow suit and increase the interest rate on your home loan.

How much your repayments will go up each month will depend on a number of factors, including if the RBA increases the cash rate to 0.25% or 0.5%, how your bank responds, and the size of your mortgage.

If you’re worried about what interest rate rises might mean for your monthly budget, feel free to get in touch with us today to explore some options, which could include refinancing or locking in a fixed rate ahead of any other future RBA cash rate hikes.

Disclaimer: The content of this article is general in nature and is presented for informative purposes. It is not intended to constitute tax or financial advice, whether general or personal nor is it intended to imply any recommendation or opinion about a financial product. It does not take into consideration your personal situation and may not be relevant to circumstances. Before taking any action, consider your own particular circumstances and seek professional advice. This content is protected by copyright laws and various other intellectual property laws. It is not to be modified, reproduced or republished without prior written consent.

New data from the lending watchdog reveals almost one in four new mortgages are risky. How are they deemed risky? Well, it’s got something to do with your debt-to-income ratio, which we’ll explain in this week’s article.

Your debt-to-income (DTI) ratio might sound complicated, but it’s really very simple to work out.

Basically, your DTI is a measurement used by lenders that compares your total debt to your gross household income.

The formula is: total debt / gross income = debt-to-income ratio.

So if you’re seeking a $700,000 home loan (and have no other debt), and you have $160,000 in gross household income, your DTI is 4.375 – a ratio most lenders would be very comfortable with.

So why do lenders care about your DTI?

Well, December quarter data just released by the Australian Prudential Regulation Authority (APRA) shows 24.4% of new mortgages have a DTI ratio of 6 or higher.

At the 6+ ratio, APRA (aka the banking watchdog) deems these loans as risky.

And they’re keen to see the percentage of these loans that lenders approve start to come down.

That’s because they’ve been steadily on the rise for a while now.

In the September 2021 quarter, for example, new mortgages with a DTI of 6 or higher were at 23.8%, while in the December 2020 quarter it was at just 17.3%.

“However, the rate of growth in the [most recent] quarter slowed,” APRA points out (probably with a sigh of relief) in their latest release.

So why has the percentage of risky loans recently risen?

The recent rise in high DTIs has most likely got a lot to do with the phenomenal price growth (and resulting FOMO!) we’ve seen across the country over the past 12-18 months.

In fact, new data released by the Australian Bureau of Statistics shows that in the 12 months to December 2021, residential property prices rose 23.7% – the strongest annual growth ever recorded.

The mean price of residential dwellings in Australia now stands at $920,100.

That’s a jump of $44,000 from the September quarter ($876,100), and a jump of $176,000 in 12 months from the December 2020 quarter ($744,000).

So with property prices increasing at such a sharp rate, and people stretching themselves to their limits to buy into the market, it has resulted in upwards pressure on high DTI percentages.

The good news is that as the property market starts to cool, so too should the growth rate of risky DTIs, which is what APRA alluded to above.

So how much can you safely afford to borrow?

There’s a fine line between maximising your investment opportunities and stretching yourself beyond your limits.

Especially so as RBA Governor Dr Philip Lowe this week warned Australians to start preparing for higher interest rates.

And that’s where we come in.

It’s not only important to stress-test what you can borrow in the current financial landscape, but also against any upcoming headwinds that are tipped to hit borrowers – such as interest rate rises and possible tightening lending standards.

But hey! Everyone’s financial situation is different. Some lenders will take into account your particular circumstances and accept a loan application where a DTI is higher than 6.

So if you’d like to find out your borrowing capacity and options, get in touch today. We’d love to sit down with you and help you map out a plan.

Disclaimer: The content of this article is general in nature and is presented for informative purposes. It is not intended to constitute tax or financial advice, whether general or personal nor is it intended to imply any recommendation or opinion about a financial product. It does not take into consideration your personal situation and may not be relevant to circumstances. Before taking any action, consider your own particular circumstances and seek professional advice. This content is protected by copyright laws and various other intellectual property laws. It is not to be modified, reproduced or republished without prior written consent.

Hold onto your hats, things are about to get a little bumpy. Economists from Australia’s biggest bank are predicting the Reserve Bank will raise the official cash rate as early as June – and we’re already seeing fixed interest rates increase significantly.

Commonwealth Bank (CBA) economists have brought forward their forecasted Reserve Bank of Australia (RBA) cash rate hike from August to June, making it the earliest prediction amongst the big four banks.

We’ll go into more detail on why CBA has brought forward their prediction below, but first something a little more concrete: we’ve definitely noticed fixed rates trending up in recent months.

Fixed rate hikes

For example, back in November, for a $700,000 loan at 80% loan-to-value ratio, a two-year fixed rate with one particular lender was 1.84%.

That rate has since gone up to 3.04% – a staggering increase.

While not every lender has increased fixed rates so significantly, we are seeing them go up across the board.

So if you have been umming and ahhing about fixing your rate lately, you’ll want to get in touch with us sooner rather than later.

Because while most lenders have recently reduced their variable rates to compensate a little, with news now that the cash rate is being tipped to increase mid-year, you can expect variable rates to increase with the cash rate.

So why has CBA brought forward their forecast to June?

Ok, so back to CBA’s June cash-rate hike prediction and why they’ve brought it forward from August.

In a nutshell, CBA senior economist Gareth Aird is anticipating inflation to be a lot stronger than the RBA is forecasting.

As a result, Mr Aird believes this will lead to a rise in the cash rate to 0.25% at the June board meeting (currently it’s at a record-low 0.1%).

“We are very comfortable with our expectation that the quarter-one 2022 underlying inflation data will be a lot stronger than the RBA’s forecast,” explains Mr Aird.

And here’s the thing: it’s not the only cash rate hike CBA is predicting the RBA will make over the next 12 months.

Mr Aird is expecting a further three rate increases over 2022 to take the cash rate to 1%, with another move to 1.25% in early 2023.

That’s five cash rate hikes over 12 months!

Get in touch today to explore your options

Believe it or not, there are more than 1 million mortgage holders out there who have never experienced a rate rise (the last RBA cash rate hike was in November 2010).

And if the CBA’s prediction of five rate hikes over the next 12 months proves right, then some households will be in for a bumpy ride as they face hundreds of dollars in extra mortgage repayments each month.

So if you’re keen to act before the RBA increases the official cash rate, get in touch with us today. We’d love to sit down with you and help you work through your options in advance.

Disclaimer: The content of this article is general in nature and is presented for informative purposes. It is not intended to constitute tax or financial advice, whether general or personal nor is it intended to imply any recommendation or opinion about a financial product. It does not take into consideration your personal situation and may not be relevant to circumstances. Before taking any action, consider your own particular circumstances and seek professional advice. This content is protected by copyright laws and various other intellectual property laws. It is not to be modified, reproduced or republished without prior written consent.

Construction costs just rose at the fastest annual pace since 2005. So why is it getting so expensive to build your own home? Today we’ll look at the materials that are becoming more expensive and why all homeowners should take note – not just renovators and builders.

“Your grandpa built this place with his own two hands”, or so your dad used to boast.

So if Pop could do it with his trusty hammer, some nails, and a bit of hard yakka, why is it so expensive to build a home of your own these days? (Your own handiwork inadequacies aside…)

Well, for starters, national construction costs increased 7.3% in the 2021 calendar year alone, which was the highest annual growth rate since March 2005.

And the not-so-great news is that property market data company CoreLogic is expecting growth in residential construction costs to remain above average over the coming quarter as supply chain disruptions persist.

“There is a significant amount of residential construction work in the pipeline that has been approved but not yet completed,” explains CoreLogic research director Tim Lawless.

So what materials are getting more expensive and harder to source?

Data shows that cost increases are being driven primarily by timber (mostly structural timber).

In fact, in the final quarter of 2021, the value of select wood imports reached their highest level on record, says Housing Industry Association (HIA) economist Thomas Devitt.

“Timber is predominantly produced domestically but excess demand, such as in a boom year like 2022, is largely sourced from overseas markets,” says Mr Devitt.

Other segments of the market also remain volatile, with increasing pressure currently on metal costs.

“With some materials such as timber and metal products reportedly remaining in short supply, there is the possibility some residential projects will be delayed or run over budget,” adds Mr Lawless.

And with building approvals for detached housing recording their strongest year on record in 2021 (with 150,000 approvals), demand isn’t expected to slow down anytime soon.

“This boom is set to keep builders busy this year and into 2023,” adds Mr Devitt.

Mr Lawless says: “With such a large rise in construction costs over the year, we could see this translating into more expensive new homes and bigger renovation costs, ultimately placing additional upwards pressure on inflation.”

Why current homeowners should also take note

Higher construction costs are likely to add to affordability challenges in the established housing market, making it harder for homeowners to upgrade.

And CoreLogic Head of Insurance Solutions Matthew Walker warns that higher building costs mean homeowners and property investors should also review their insurance cover.

“In these times of rapidly rising home and construction costs, under insurance can quickly become a real threat to what is a most valuable asset,” says Mr Walker.

“It’s important that homeowners keep track of their sum insured and annually check that it is sufficient should the worst occur by using their insurer’s rebuild calculator or giving them a call.”

How to get the right kind of finance for a construction project

Finding the right kind of finance for a construction project can be tricky at the best of times – let alone when building supplies are becoming more expensive and wait times are blowing out due to supply constraints.

That’s why it’s important to team up with a professional like us when looking for a construction loan.

Not only can we help you secure a great rate, but we can also help you select a loan that allows flexibility for any unforeseen contingencies.

So if you’d like to explore your options for your next building or reno project, then get in touch today – we’d love to help you map out a plan for your 2022 building and property goals.

Disclaimer: The content of this article is general in nature and is presented for informative purposes. It is not intended to constitute tax or financial advice, whether general or personal nor is it intended to imply any recommendation or opinion about a financial product. It does not take into consideration your personal situation and may not be relevant to circumstances. Before taking any action, consider your own particular circumstances and seek professional advice. This content is protected by copyright laws and various other intellectual property laws. It is not to be modified, reproduced or republished without prior written consent.

Australian homeowners are loading up their offset accounts in record amounts, so much so that the average household is now almost four years ahead on their mortgage payments.

Quick question: do you have an offset account (or several) attached to your mortgage?

They’ve become quite popular in recent years, especially since the RBA’s official cash rate has hit record low levels and impacted the amount of interest you can earn in savings accounts (which we’ll explain in more detail further below).

But first, how much have offset balances increased?

Research from the Australian Prudential Regulation Authority (APRA), provided to The Australian, shows the average balance sitting in offset accounts is now nearly $100,000 – up almost $20,000 since the pandemic kicked off in March 2020.

In total, $222 billion was in offset accounts across the country as of September 2021 – up almost $50 billion from $174 billion in March 2020.

In fact, in the September 2021 quarter alone, offset account balances increased by 10%.

All of this has helped contribute to mortgage holders now being, on average, 45 months ahead on their repayments – up from 32 months prior to the pandemic.

In terms of the various ways Australians have gotten ahead, 57% of prepayments came from offset accounts, 40% via available redraw balances, and 3% through other excess repayments.

So what’s an offset account?

Basically, an offset account is a regular transaction account that is linked to your home loan.

The advantage is that you only pay interest on the difference between the money in the account and the mortgage.

Some banks allow you to have 10 offset accounts attached to your mortgage, too, with cards linked to them that you can use for everyday spending.

How exactly does it work?

Say you owe $350,000 on your mortgage, and have $50,000 in a savings account.

If you move that $50,000 into a full offset account, you’ll only pay interest on $300,000 (which is the loan value minus the amount in your offset account).

The offset account can then continue to be used for all your daily needs, like receiving your salary or withdrawing cash.

So why would you consider an offset account over a savings account?

With the RBA’s cash rate at record low levels, the interest rate you’ll receive on the balance in your bank’s savings account is also at record low levels too.

Say for example that you had a savings account with a 1% interest rate and a mortgage with a 2.2% interest rate.

By allocating money into your full offset account, you’d save more money on interest than you would earn in your savings account.

Additionally, interest on your savings accounts is subject to tax, whereas the interest-saving on your mortgage isn’t.

Is an offset account for you?

Of course, there are additional factors you’ll want to consider, such as account keeping fees and the minimum amount needed in the account to make it useful.

And obviously, savings accounts and offset accounts are not the only two places you can park your hard-earned money. Depending on your risk appetite, there are other options you could consider that might yield a higher return.

The long and the short of it is everyone’s situation is different, but if you think an offset account might be for you, get in touch and we can help you explore your options.

Disclaimer: The content of this article is general in nature and is presented for informative purposes. It is not intended to constitute tax or financial advice, whether general or personal nor is it intended to imply any recommendation or opinion about a financial product. It does not take into consideration your personal situation and may not be relevant to circumstances. Before taking any action, consider your own particular circumstances and seek professional advice. This content is protected by copyright laws and various other intellectual property laws. It is not to be modified, reproduced or republished without prior written consent.