Australian households have enjoyed years of low interest rates and low unemployment but with the jobless rate rising and inflation nearing the top of the RBA’s comfort range, 2014 could be a tighter year for family budgets.
The federal budget in May could make the household budget even tighter with the Abbott government foreshadowing spending cuts to bring the nation’s finances into line.
On Thursday, new data showed that inflation jumped to a two-year high of 2.7 per cent after growing at double economists’ expectations in the December quarter.
The jump in the rate of inflation will have been as much as a surprise to consumers as it was to economists. And it means that consumers hoping for further interest rate relief could be disappointed when the RBA meets for the first time this year at the start of February.
Rates not going lower
RBC Capital Markets strategist Michael Turner concedes the latest CPI has diminished his expectation of another interest rate cut by the RBA but believes the central bank has time to wait until March quarter inflation numbers due in April to get a better picture on prices.
“We would argue that its easing bias has been as much about instilling confidence in the broader community that rates are not going up anytime soon as about exciting the community that rates might go down again,” Mr Turner said in a note to clients.
Alex Parsons, chief executive of financial comparison website RateCity, expects dampened enthusiasm over another rate cut could prompt borrowers to consider fixing their home loan.
“The opportunities to lock in a fixed rate under five per cent are there, so it’s attractive for people to be looking into it,” Mr Parsons says.
The interest rate tide has turned, and homeowners are being told to prepare for possible rate hikes by year-end. Australia’s cash rate currently sits at a record low of 2.5 per cent.
Time to fix?
Mortgage Choice’s Jessica Darnbrough said homeowners have been flocking to fixed rate mortgages since late last year in a bid to lock in low rates.
Some fixed rates had reached historical lows thanks to aggressive competition among lenders, she said.
“Our December figures show 33 per cent of all loans written through Mortgage Choice were fixed loans – wholly or partly fixed – it’s definitely the highest we’ve seen in six years, since March 2008,” she said.
“That doubled since the beginning of the year – in January, 16.35 per cent of all loans written were fixed rate and by the end of the year, it was 33 per cent.
“We expect that trend to continue as people are looking for that security and that stability and that piece of mind.”
Michelle Hutchison, from comparison website Finder.com.au, said it was important to work out whether the interest paid on a fixed rate was worth the security and stability.
If you can find a fixed rate loan lower than the variable rate you’re currently paying, you’re onto a good deal, she said.
Those looking to buy a property may need to consider lowering their budget or saving a bigger deposit, she said.
Bigger deposits help lessen the effect of rate hikes but homebuyers also need to consider lenders mortgage insurance, a significant additional expense if you have less than a 20 per cent deposit, she said.
“If you think you will have trouble making your loan repayments if there is a rate hike then you might want to consider waiting until you have a bigger deposit saved or lowering your borrowing budget,” Ms Hutchison said.