0:07

Hello and welcome to It All Adds Up the podcast

0:10

where we chat about money, how to get it, how to

0:12

spend it and how to invest it. I'm money

0:14

editor of the Sydney Morning Herald and The Age newspaper's

0:16

Dom Powell .

0:16

And I'm senior economics writer Jess Irvine.

0:19

And this week, we're continuing our special

0:21

series, focusing on real

0:24

life budgets and how you're

0:26

tackling the rising cost of living.

0:28

Yes. And last week we had a lovely

0:30

question from Jewel, our first caller in

0:32

to the podcast, if you can really call into a podcast.

0:35

And she had some questions about affording her first

0:37

home. And this week we've got

0:39

a question from listener Clare,

0:41

who was facing some pretty steep rises on

0:43

her cost of living and a mortgage cliff

0:45

like so many of us are. So let's

0:47

have a listen to what Claire has to say.

0:51

Hi, Jason. I'm Claire.

0:54

I'm a single mom of a five month old.

0:57

I work full time. I'm on maternity

0:59

leave at the moment. And

1:02

I just wanted your thoughts and ideas on

1:04

where I'm at with my budget. So

1:06

I've recently paid off

1:09

a $5,500 loan

1:11

that I use to pursue

1:14

IVF. I'll

1:16

have childcare costs when I go back

1:18

to work for my little one in

1:20

April or May, so I'll need to start

1:22

paying for childcare. And

1:26

I also come off my low interest

1:29

fixed mortgage

1:31

of 1.89%

1:33

for my apartment. It's

1:35

a loan of about $600,000

1:38

in September. So I've got these

1:40

changes coming up and I just really appreciate

1:43

your thoughts and reflections

1:45

or any insights. And yeah, thanks

1:47

very much for your work on the podcast so far.

1:51

Thanks for that, Claire. And yes,

1:53

ouch. Couple of sort of big costs

1:55

that are coming in there. Obviously, child care,

1:58

a pretty big one and coming

2:00

off a very low rate. 1.89 is

2:02

super low. So that will be a very big

2:05

switch once she rolls off

2:07

her mortgage. Just you've got to

2:09

look at Claire's budget. What do

2:11

you think?

2:11

Yeah, I think it is very similar to

2:13

my own budget, not least of all because

2:16

she uses my money with just a tracking

2:18

system. But yes. Yeah. Same

2:20

situation of being a single parent

2:23

with a mortgage of about that size.

2:25

I locked in at 1.84%

2:28

for two years, so I

2:31

hit my mortgage cliff on June 30.

2:33

And to be honest, I feel a little

2:35

bit uncomfortable knowing, planned and prepared

2:38

for it. But it's just this very uncomfortable

2:40

feeling of staring down the barrel of that mortgage.

2:43

Cliff And Adam, I think you fixed in as well

2:45

did Yeah.

2:45

I'm I'm slightly worse I'm at 2.79

2:49

but I've got that until April

2:51

2024. So I'm really hoping that by that

2:53

point that Phil Lowe starts to think about

2:55

putting interest rates back down again. But

2:58

that's me being incredibly optimistic.

3:00

Yeah, well, I mean, that is that is of what the

3:02

sort of market pricing is, is for rates to

3:04

sort of hit the roof this year and then come

3:06

back down again next year. But

3:08

who knows really what will happen. But yeah,

3:10

I did have a good look through Claire's spreadsheets

3:13

and worksheets that she sent me. And first

3:15

of all, she's doing an amazing job. And I

3:17

think if anybody's in the situation

3:19

of facing the mortgage cliff, the

3:21

best thing you can be doing is, you know, having

3:24

visibility around where your money is going and

3:26

tracking it in some way and not just putting your head

3:28

in the sand and sort of just hoping

3:31

for the best. So, yes, I mean,

3:33

the good thing for Claire is that she has

3:35

that full time permanent job in

3:37

a relatively sheltered or a

3:39

sector that shouldn't be too affected. If

3:41

we do hit some harder times that she

3:43

will return to when she's finished on her

3:45

parental leave. I did look

3:48

through and she was prior

3:50

to the leave making

3:53

extra repayments on the mortgage.

3:55

So many people will find that they are ahead

3:58

of what they work, their minimum repayments, you

4:00

know, that they were paying in. So there

4:03

is about a $1,000 per month

4:05

buffer there that she was chipping in. So,

4:07

you know, and we'll go through the figures later,

4:09

but that might be about what she's

4:11

required to pay extra in

4:14

interest per month anyway. You know

4:16

she's got this great savings history of paying

4:18

off that IVF loan. So

4:20

it does look like Claire is running herself a

4:23

surplus. So she's she's able to save money

4:25

and she's also provisioning in

4:27

her budget for the big surprise

4:29

expenses that hit people like car expenses,

4:32

strata fees. She's

4:34

putting aside monthly amounts for that,

4:36

which I love to see in budgets.

4:38

People sort of anticipating those big expenses.

4:42

But yeah, there's definitely some huge

4:44

costs that she's staring

4:47

down the barrel of child care

4:50

thing. One in particular.

4:52

Yes. I mean, I had to look at the

4:54

budgets as well and put mine

4:56

to shame, I'd just like to say. But

4:59

it doesn't take much to put mine to shame. So,

5:01

you.

5:01

Know, no shade. But, you.

5:02

Know, it's it's shame. It's allowed to be shame.

5:05

It's all right. But no, I was very

5:07

impressed. But I did think that, yes, you know, she

5:09

doing a great job in provisioning for everything

5:12

that sort of, you know, life can throw at you. She had sort of,

5:14

I think, for different little sort

5:16

of Future Fund savers for for various

5:18

different things, which I think is great. But yes,

5:21

you're right. Childcare costs a

5:23

big one.

5:24

Yeah. Look, it's massive. And I

5:26

think overall, you know,

5:28

when we're hitting the mortgage cliff and the childcare

5:31

costs at the same time, this is going

5:33

to really stress

5:35

the budget. Oh my gosh.

5:37

Are so my child is now

5:40

eight. Back in the day,

5:42

you know, he went to daycare sort of.

5:44

And when he was less than one and

5:46

we were there for a couple of years and we were paying

5:48

for long daycare center

5:52

in the inner CBD and I think

5:54

it was about $150 per

5:56

day. Wow. Oh, really? Yes.

5:59

Oh, my gosh. Which there is. The government has

6:01

a childcare subsidy, which has changed

6:03

since I was there. We used to have this situation

6:05

where we'd maxed out the subsidy and then

6:07

we would be paying full freight for

6:10

a for a couple of months

6:12

of the year. That's sort of since

6:14

been rejigged. But yeah, that is not

6:16

uncommon and I expect it is much

6:18

higher and probably creeping towards the

6:20

$200 per day for

6:22

some of those CBD long

6:24

care where you can go from sort of 7

6:26

a.m. to 6 p.m. or whatever those those

6:29

hours are. So and you're not allowed to pay

6:31

for just a little bit of the day, you just need a

6:33

few hours, you pay for the full day

6:36

and you pay for the days when your

6:38

child is sick and actually unable to

6:40

attend the centre and you

6:42

are unable to work. And yes, there

6:44

are a lot of those days because kids go to daycare

6:46

and they get sick all the time and

6:48

then they make you sick, so. Just

6:51

sort of to put a little word

6:53

of warning out there for Clare

6:56

and others who were sort of in. It's a really

6:58

tough time to navigate and it's

7:00

a time when it's probably going to be hard

7:02

to save much money. You're sort of treading

7:04

water just to afford those those

7:07

childcare costs. So in

7:09

terms of preparing for that, you know,

7:12

you know, actually finding a place is a whole

7:14

other thing. And I presume Clare is, you

7:16

know, researching that, making

7:19

sure that you're registered for the childcare subsidy

7:21

and having some understanding of what you

7:24

can get back on those costs.

7:26

Yeah. So for anyone who isn't aware, your

7:28

family, if your family incomes between zero

7:31

to around $70,000, your

7:33

childcare subsidy percentage is 85%.

7:36

But if you're over 72000

7:39

to 177000,

7:42

it's between 85 and

7:44

50% your subsidy and it

7:46

goes down by 1% for every

7:48

$3,000 worth of income

7:50

that your family earns. So it's sort of I

7:52

guess it's staged, you know, for those

7:55

higher income earners.

7:56

Yeah. And that should increase from

7:59

July one, I think it is. The Labor

8:01

Government has announced some changes

8:03

to that as well to make it slightly

8:05

more generous for people.

8:07

But those are the current rates that

8:09

apply and it's not hugely more generous,

8:12

although I get some billions of dollars

8:15

in aggregate and it's.

8:16

Still not it's still not free.

8:18

It's still not free. There is a review

8:20

of there's a Productivity Commission review and

8:22

there's an early years strategy. And

8:24

there's a really compelling argument that spending

8:26

taxpayer money in this area yields

8:29

benefits, you know, and higher taxes in the future

8:31

because you get good child

8:33

outcomes from at least some

8:35

exposure to that early learning environment.

8:37

So yeah, unfortunately

8:40

at the moment it's still expensive. We haven't

8:42

made it easy for families and

8:44

yeah, for Clare to sort of be looking at how

8:47

many days she's going in and what the price

8:49

is and what the potential subsidy is

8:51

and trying to figure out how that fits into

8:53

the budget. That's something to

8:55

definitely try and get ahead of, at least in

8:57

a planning sense. Yeah.

8:59

Absolutely. And that might mean that she has to put a little

9:01

less into those sort of, you know, Future Fund savers

9:03

that we were talking about, maybe to sort of scale those

9:05

down a bit. So you're not contributing nothing but

9:07

you contributing, you know, maybe

9:09

50 bucks less, each sort of thing.

9:11

And then particularly on the more discretionary

9:14

ones, like a holiday, she's got a holiday fund.

9:16

Some of the ones like, you know, strata fees. Yeah,

9:19

unfortunately. But yeah, we'll

9:21

get to some of the nice things that

9:23

might have to go at the end.

9:25

But yeah, let's get to the mortgage.

9:28

So this is the one that, you

9:30

know, we're both facing down, although

9:32

mine's a little bit more imminent.

9:35

So what do you think's going to happen to interest

9:37

rates?

9:37

Oh, is that, is that the million dollar question? Is

9:40

this where I get to become Phil Lowe

9:42

successor? I mean.

9:43

It's about the sort of $1,000 per

9:45

tax on the average mortgage.

9:46

Really? Well, funnily enough, so I was looking the other day

9:48

because I was thinking about what my interest rates might

9:50

be looking like once I get off my loan.

9:53

And right now I was it's looking like something

9:55

like 6.2% on

9:58

like an average variable interest rate, which

10:00

is crazy. Like that's, that's more than double

10:03

what I'm on at the moment. I mean,

10:05

I've got until April 20, 24. I'm crossing

10:07

my fingers and toes to hope that things start

10:09

to look a little bit sort of calmer then,

10:11

and I might be able to get on to a maybe

10:14

a four.

10:15

Ish.

10:16

Four or five ish percent.

10:18

You can dream.

10:19

I will dream. And I do dream every

10:21

night of a 4.4 to 5%

10:23

interest rate.

10:24

Yeah, I can. So I'm fixed,

10:26

but I have a small proportion of my loan

10:29

on variable, but it's where

10:31

I park my emergency fund, so it's completely

10:33

offset and I don't actually incur the interest, but I'm

10:35

able to check in and go, what is

10:37

the sort of variable rate of interest that my bank

10:39

is charging and that I'm likely to revert to?

10:42

And it's currently 5.74%

10:46

depending when you're listening to this. We're expecting

10:48

at least another one or two more rises. So

10:51

they're likely to revert me to something

10:53

with a six plus percent from

10:55

a 1.84.

10:57

This is what Claire can expect as well. When

10:59

we come around to September, she's probably going to be

11:01

looking at a six point something

11:04

interest rate, which, you know, is

11:06

three times the amount that she was on, which

11:08

is a massive, massive increase. So

11:11

like, I think we've done some calculations

11:13

or you've done some calculations just in terms like what's

11:16

what's that sort of increase a month looking like?

11:18

Yeah. If you really want to freak yourself out or get

11:21

prepared for this or do both at

11:23

the same time, I'm Google Money Smart

11:25

mortgage calculator and it has

11:27

a handy little tool there where you put

11:29

in how big your home loan is, your current

11:32

rate. You know, if you're on a 25

11:34

or 30 year term and it spits out

11:36

your monthly repayments so you can have a little

11:38

bit of a play. And

11:40

currently Claire's looking she's probably

11:42

paying about 2200

11:45

per month on her mortgage, the

11:47

minimum sort of required that would be

11:50

if. It rolls off to a 6%

11:53

interest rate that rises to about

11:55

$3,600

11:57

and she'll be needing to find an extra $1,400

12:02

per month.

12:03

That's a lot of dough.

12:04

At the same time that you've got the childcare costs

12:07

kicking in. So you know, who

12:09

knows, by September, that's when she

12:12

is rolling off. Having

12:14

said that, you know, the 6%

12:17

and the sort of, you know, what I'm on

12:19

is sort of the it's the

12:21

sort of top shelf or it's the

12:23

one that they put you on if you've been a loyal

12:25

customer for a while. It's

12:27

not the really great new rates that

12:29

you can get by being a new customer.

12:32

And one of the it's not an endorsement, but I do like

12:34

to check the website of Tick Tock loans.

12:37

TikTok. Not

12:39

the dancing app. Not the dancing app.

12:42

I like to check that one too. But Tick

12:44

Tock is currently advertising

12:46

an interest rate of variable

12:48

of 4.56.

12:51

So that's compared to my variable

12:53

rate of 5.74, which is

12:55

about 1.2 percentage points cheaper. Yeah.

12:57

So there are better deals.

12:59

And if you particularly if you are locked in with

13:02

one of the bigger lenders, just

13:04

be aware that they're probably going to pop you on a right that

13:06

is not competitive and it is definitely

13:08

time to be shopping around.

13:11

My current homeland is with one of the sort of

13:13

the newer lenders, the neo bank lenders, so

13:16

to speak. And yeah, they're great because

13:18

they don't have the overheads that the other banks

13:20

do. So they can offer these really competitive

13:22

rates, but they also can and

13:24

like everyone's doing this because I don't know

13:26

if anyone's been reading the finance

13:29

reports from the banks this week. This is

13:31

very business journalist, nerdy business journalist thing to

13:33

do. But apparently the mortgage market

13:35

is incredibly competitive. They've been. The Bendigo

13:38

Bank CEO said that it was like crazy,

13:40

like she was like, I've never seen anything like this. So

13:43

there are banks are out there, they are

13:45

desperate for a business and they are giving big

13:47

fat cashbacks like just obscenely

13:49

high, like five $6,000 in

13:51

some cases. So this is something else

13:54

to think about when you're refinancing, which

13:56

may well be that not only can you

13:58

sort of go to one of these sort of smaller lenders that might

14:00

be able to give you a competitive right, but they're

14:02

also then going to give you five grand as

14:04

well?

14:05

Yeah, if you can handle all the paperwork involved,

14:08

if you switched every six months, you could offset

14:10

the impact of the higher rates by sort

14:12

of getting those juicy cashbacks, although

14:14

that may affect your credit rating, that

14:16

you might not be able to play that card too many times.

14:19

Yeah. And with the the neobanks

14:22

or the smaller lenders, it can be

14:24

a little bit more tricky if you're self-employed

14:27

or you've got sort of circumstances where you

14:29

can't just immediately lodge the payslip to

14:31

show easily he's the income.

14:33

So it's not an option for everyone.

14:35

But if you do sort of have the income, you can

14:38

substantiate quite clearly. And

14:40

importantly, if you've got enough equity in

14:42

your home, which is something we might

14:44

mention as well for the mortgage prisoners

14:46

out there. Do you want to explain what a

14:48

mortgage prisoners?

14:51

Yes. So, I mean, you considered a very

14:53

dramatic term, but you're considered a mortgage

14:55

prisoner if your equity in your home has fallen

14:57

below 20%, so it might not of

14:59

it might have been above 20% initially

15:02

when you bought the place, but the value of the property might

15:04

have dropped or or anything you might have happened

15:06

and it's fallen below that 20%. So you now

15:08

face lenders mortgage insurance

15:10

if you refinance, which

15:12

means the whole sort of process of refinancing becomes

15:15

more expensive when the whole idea is

15:17

that it's supposed to be cheaper. So it becomes

15:20

sort of like financially unviable to

15:22

leave your your mortgage, Right. So

15:24

therefore, you sort of trapped in it.

15:25

Yeah. I mean, and you can if the savings on the

15:27

interest was going to be very substantial, it

15:29

might be worth paying the lender's mortgage insurance,

15:32

which can sort of be amortized into your payments

15:34

across the the length of the loan

15:36

in some cases. So it's worth investigating.

15:39

It's going to be a bit tricky. You know, I would say

15:41

reach out to a mortgage broker or just walk

15:43

into a bank in like we did

15:45

in the olden days and have a chat

15:47

about what your options are and start

15:49

to have that chat. I would say

15:51

at least two months out from

15:54

when your fixed rate is ending,

15:56

you want to know from your lender what

15:59

right are you going to put me on? Or at least what is it now?

16:01

And you know, if rates go up, what will be added

16:03

to that? So you can start

16:05

to shop around and look at all those

16:07

usual sites that can sort of compare

16:09

the market, find a right city

16:12

and get an idea of what those competitive

16:14

deals are. Because you're right, Tom, You know, we still

16:16

have this vision of the banks of, you know, they're there,

16:19

they're not doing deals. They're

16:21

charging around high rates. But for new customers,

16:23

there really are some competitive write out

16:26

there. And you want to make sure that you get one of them.

16:28

Yeah.

16:28

And like basically just never take anything at face value.

16:31

Right? Never, never take the first

16:33

number you're given, you know, when when

16:35

these sort of things come along because there's almost always

16:38

going to be either from that lender or a different.

16:40

Linda a better offer.

16:41

Yep. And even if you don't switch, call your

16:43

current lender and say, Hey, you've just put me on this

16:46

vastly inflated rate. Can you can

16:49

you do better place? Otherwise I will walk

16:51

away, you know, to treat a mean ticket

16:53

That's.

16:54

It's like in love like in finance.

16:58

So sort of looking at Clare's budget

17:00

in terms of things that she spends money on. Jess,

17:03

you've actually identified some areas

17:05

in in Claire's budget where, you

17:07

know, you think she might be able to trim some costs

17:09

to be able to close that gap for when

17:11

she hits this mortgage cliff.

17:13

Yeah. So I think once you factor

17:15

in the higher mortgage repayments

17:17

and the childcare costs, we could be

17:19

a little bit close and there's going

17:21

to be a need to look at

17:23

the more variable or discretionary

17:26

purchases as we all are.

17:29

And some of those things can include

17:31

things like eating out. So there's a couple of hundred

17:33

bucks some months for eating out

17:35

in the budget or in what we're observing

17:37

in the spending. For Claire, sometimes

17:40

there's Ubers, you know,

17:42

going to to wherever we're going.

17:45

And, you know, she's got the same problem

17:47

that I've got, which is home decor, which

17:50

I suspect means she's going to Kmart too

17:52

much, which I used to do is you just go on a little trip

17:54

and you just want some more pillows or candles

17:56

or whatever it is. So maybe

17:58

there's there's a 100 or something bucks a month

18:01

going on that, you know, there's

18:03

there's also like a bit of skincare

18:05

spending, you know, And I'm like not about

18:07

about like don't spend any money on

18:10

yourself, but. This is

18:12

the time where we're sort of investigating

18:14

the cheaper options. We're not walking

18:16

into Mecca, we're walking into Chemist

18:19

warehouse somewhere, not doing the top brands.

18:21

We're sort of understanding a tub.

18:23

Of a tub of Vaseline. That's

18:27

good for your skin, right? Yeah.

18:29

Moisture. A set of film face cleanser.

18:31

I'm like, but like,

18:33

we're trying. The store bought shampoos

18:36

where, you know, we're not turning our nose up

18:38

at some of the home brands in the cheaper options.

18:41

So that's where we can just do a little

18:43

bit more of the finessing, you

18:45

know, around going out. And I

18:47

think to be honest with you, you know,

18:49

if you've got the big mortgage, it's probably

18:51

going to mean I hope you had your post-COVID

18:54

holiday already because we might not be having one

18:56

of those in the next year or two.

18:58

And, you know, that sounds sad,

19:00

but if you're looking for ways

19:03

that you can cut your discretionary spending,

19:05

I think that some of the big ticket items people might be

19:07

just staycation ing. If you're meeting

19:09

up with friends, we're going for a walk in the park.

19:12

We're not going out for dinner. So some of those

19:14

little changes like that just to flag

19:16

that, they are things that you can tinker with

19:18

and you know, in ordinary times, I'd

19:21

love to see those in everybody's budgets. But

19:23

when we're battening down the hatches and preparing

19:25

for this massive mortgage cliff,

19:28

the big pain that is coming, there

19:30

are some of the little tweaks that we can make that really do

19:33

add up.

19:34

Yeah, absolutely. And that's the name of the

19:36

podcast. It all adds up.

19:37

I just realized it all adds up. Mike dropped

19:39

that and.

19:42

But yes, look, I think in conclusion,

19:44

Clare has a very solid looking budget

19:47

and she's doing a great job squirreling

19:49

extra bits of cash away. But you know, these

19:51

childcare costs that will be coming through the

19:54

mortgage, significant increase in the mortgage

19:56

repayments will be coming through will mean that she'll have

19:58

to start trimming some costs here and there.

20:01

Yeah. And I would say get on that money Smart

20:03

mortgage calculator today everyone,

20:05

and start playing with your numbers and

20:08

getting some idea of what that hit

20:10

is going to be. We don't know exactly what's going to happen

20:12

to interest rates, but running some scenarios

20:15

and figuring out what is in my budget

20:17

that can go overboard when

20:20

that comes. So the key takeaways,

20:22

I think for Claire, you've got those

20:24

childcare costs coming at you

20:27

and that is going to eat up a big chunk

20:29

of your what was formerly your

20:32

savings. So just be braced

20:34

for that. It won't be forever. Eventually kids go

20:36

to to school and

20:38

if you go to a public school, you will feel

20:41

that relief of thousands of dollars a

20:43

year streaming back into your budget. And again,

20:45

with the mortgage cliff, you know, we've got rates

20:48

going up. They won't keep going

20:50

up forever. And hopefully we will get

20:52

to a point where we've got on top of inflation

20:54

and interest rates can start to come

20:57

back down again. And that will

20:59

relieve the pressure on people. But there's

21:01

definitely this pinch point coming

21:03

for at least the next sort of 6

21:05

to 12 months where we will have to

21:07

batten down the hatches and look at some

21:10

of the discretionary spending. And I think

21:12

that if Claire continues to keep a really close

21:14

eye on her expenses, that

21:16

that she'll be well equipped to do that.

21:20

Thanks, Clare, for calling in with your

21:22

budgets and some questions. We loved hearing

21:24

it and thanks everyone else who's been sending in

21:26

their their budgets and questions. It's

21:28

been great to read. We're working through it slowly.

21:31

And you know, you'll be hearing someone new next week

21:33

with with some more questions about

21:35

a whole bunch of different stuff. So thanks so much

21:37

for listening, as always. And we will see you

21:39

next week.

21:40

Thanks for listening. See you next week.

21:49

This episode of It All Adds Up is produced by

21:51

Chee Wong. The information discussed

21:53

is general in nature and does not take into account

21:56

your personal financial situation, goals

21:58

or objectives. You should always do your

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22:02

making any major financial decisions. If

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