Hello and welcome to It All Adds Up the podcast where we chat about money, how to get it, how to spend it and how to invest it. I'm money editor of the Sydney Morning Herald and The Age newspaper's Dom Powell .
And I'm senior economics writer Jess Irvine. And this week, we're continuing our special series, focusing on real life budgets and how you're tackling the rising cost of living.
Yes. And last week we had a lovely question from Jewel, our first caller in to the podcast, if you can really call into a podcast. And she had some questions about affording her first home. And this week we've got a question from listener Clare, who was facing some pretty steep rises on her cost of living and a mortgage cliff like so many of us are. So let's have a listen to what Claire has to say.
Hi, Jason. I'm Claire. I'm a single mom of a five month old. I work full time. I'm on maternity leave at the moment. And I just wanted your thoughts and ideas on where I'm at with my budget. So I've recently paid off a $5,500 loan that I use to pursue IVF. I'll have childcare costs when I go back to work for my little one in April or May, so I'll need to start paying for childcare. And I also come off my low interest fixed mortgage of 1.89%
for my apartment. It's a loan of about $600,000 in September. So I've got these changes coming up and I just really appreciate your thoughts and reflections or any insights. And yeah, thanks very much for your work on the podcast so far.
Thanks for that, Claire. And yes, ouch. Couple of sort of big costs that are coming in there. Obviously, child care, a pretty big one and coming off a very low rate. 1.89 is super low. So that will be a very big switch once she rolls off her mortgage. Just you've got to look at Claire's budget. What do you think?
Yeah, I think it is very similar to my own budget, not least of all because she uses my money with just a tracking system. But yes. Yeah. Same situation of being a single parent with a mortgage of about that size. I locked in at 1.84% for two years, so I hit my mortgage cliff on June 30. And to be honest, I feel a little bit uncomfortable knowing, planned and prepared for it. But it's just this very uncomfortable feeling of
staring down the barrel of that mortgage. Cliff And Adam, I think you fixed in as well did Yeah.
I'm I'm slightly worse I'm at 2.79 but I've got that until April 2024. So I'm really hoping that by that point that Phil Lowe starts to think about putting interest rates back down again. But that's me being incredibly optimistic.
Yeah, well, I mean, that is that is of what the sort of market pricing is, is for rates to sort of hit the roof this year and then come back down again next year. But who knows really what will happen. But yeah, I did have a good look through Claire's spreadsheets and worksheets that she sent me. And
first of all, she's doing an amazing job. And I think if anybody's in the situation of facing the mortgage cliff, the best thing you can be doing is, you know, having visibility around where your money is going and tracking it in some way and not just putting your head in the sand and sort of just hoping for the best. So, yes, I mean, the good thing for Claire is that she has that full time permanent job in a relatively sheltered
or a sector that shouldn't be too affected. If we do hit some harder times that she will return to when she's finished on her parental leave. I did look through and she was prior to the leave making extra repayments on the mortgage. So many people will find that they are ahead of what they work, their minimum repayments, you know, that they were paying in. So there is about a $1,000 per month buffer there that she was
chipping in. So, you know, and we'll go through the figures later, but that might be about what she's required to pay extra in interest per month anyway. You know she's got this great savings history of paying off that IVF loan. So it does look like Claire is running herself a surplus. So she's she's able to save money and she's also provisioning in her budget for the big surprise expenses that hit people like car expenses, strata fees. She's putting aside monthly amounts for that, which I love
to see in budgets. People sort of anticipating those big expenses. But yeah, there's definitely some huge costs that she's staring down the barrel of child care thing. One in particular.
Yes. I mean, I had to look at the budgets as well and put mine to shame, I'd just like to say. But it doesn't take much to put mine to shame. So, you.
Know, no shade. But, you.
Know, it's it's shame. It's allowed to be shame. It's all right. But no, I was very impressed. But I did think that, yes, you know, she doing a great job in provisioning for everything that sort of, you know, life can throw at you. She had sort of, I think, for different little sort of Future Fund savers for for various different things, which I think is great. But yes, you're right. Childcare costs a big one.
Yeah. Look, it's massive. And I think overall, you know, when we're hitting the mortgage cliff and the childcare costs at the same time, this is going to really stress the budget. Oh my gosh. Are so my child is now eight. Back in the day, you know, he went to daycare sort of. And when he was less than one and we were there for a couple of years and we were paying for long daycare center in the inner CBD and I think it was about $150 per day. Wow. Oh, really? Yes. Oh,
my gosh. Which there is. The government has a childcare subsidy, which has changed since I was there. We used to have this situation where we'd maxed out the subsidy and then we would be paying full freight for a for a couple of months of the year. That's sort of since been rejigged. But yeah, that is not uncommon and I expect it is much higher and probably creeping towards the $200 per day for some of those CBD long care where you can go from sort of 7 a.m.
to 6 p.m. or whatever those those hours are. So and you're not allowed to pay for just a little bit of the day, you just need a few hours, you pay for the full day and you pay for the days when your child is sick and actually unable to attend the centre and you are unable to work. And yes, there are a lot of those days because kids go to daycare and they get sick all the time and then they make you sick, so. Just sort of to put a little word of warning out there
for Clare and others who were sort of in. It's a really tough time to navigate and it's a time when it's probably going to be hard to save much money. You're sort of treading water just to afford those those childcare costs. So in terms of preparing for that, you know, you know, actually finding a place is a whole other thing.
And I presume Clare is, you know, researching that, making sure that you're registered for the childcare subsidy and having some understanding of what you can get back on those costs.
Yeah. So for anyone who isn't aware, your family, if your family incomes between zero to around $70,000, your childcare subsidy percentage is 85%. But if you're over 72000 to 177000, it's between 85 and 50% your subsidy and it goes down by 1% for every $3,000 worth of income that your family earns. So it's sort of I guess it's staged, you know, for those higher income earners.
Yeah. And that should increase from July one, I think it is. The Labor Government has announced some changes to that as well to make it slightly more generous for people. But those are the current rates that apply and it's not hugely more generous, although I get some billions of dollars in aggregate and it's.
Still not it's still not free.
It's still not free. There is a review of there's a Productivity Commission review and there's an early years strategy. And there's a really compelling argument that spending taxpayer money in this area yields benefits, you know, and higher taxes in the future because you get good child outcomes from at least some exposure to that early learning environment. So yeah,
unfortunately at the moment it's still expensive. We haven't made it easy for families and yeah, for Clare to sort of be looking at how many days she's going in and what the price is and what the potential subsidy is and trying to figure out how that fits into the budget. That's something to definitely try and get ahead of, at least in a planning sense. Yeah.
Absolutely. And that might mean that she has to put a little less into those sort of, you know, Future Fund savers that we were talking about, maybe to sort of scale those down a bit. So you're not contributing nothing but you contributing, you know, maybe 50 bucks less, each sort of thing.
And then particularly on the more discretionary ones, like a holiday, she's got a holiday fund. Some of the ones like, you know, strata fees. Yeah, unfortunately. But yeah, we'll get to some of the nice things that might have to go at the end. But yeah, let's get to the mortgage. So this is the one that, you know, we're both facing down, although mine's a little bit more imminent. So what do you think's going to happen to interest rates?
Oh, is that, is that the million dollar question? Is this where I get to become Phil Lowe successor? I mean.
It's about the sort of $1,000 per tax on the average mortgage.
Really? Well, funnily enough, so I was looking the other day because I was thinking about what my interest rates might be looking like once I get off my loan. And right now I was it's looking like something like 6.2% on like an average variable interest rate, which is crazy. Like that's, that's more than double what I'm on at the moment. I mean, I've got until April 20, 24.
I'm crossing my fingers and toes to hope that things start to look a little bit sort of calmer then, and I might be able to get on to a maybe a four.
Ish.
Four or five ish percent.
You can dream.
I will dream. And I do dream every night of a 4.4 to 5% interest rate.
Yeah, I can. So I'm fixed, but I have a small proportion of my loan on variable, but it's where I park my emergency fund, so it's completely offset and I don't actually incur the interest, but I'm able to check in and go, what is the sort of variable rate of interest that my bank is charging and that I'm likely to revert to? And it's currently 5.74% depending when you're listening to this. We're expecting at least another
one or two more rises. So they're likely to revert me to something with a six plus percent from a 1.84.
This is what Claire can expect as well. When we come around to September, she's probably going to be looking at a six point something interest rate, which, you know, is three times the amount that she was on, which is a massive, massive increase. So like, I think we've done some calculations or you've done some calculations just in terms like what's what's that sort of increase a month looking like?
Yeah. If you really want to freak yourself out or get prepared for this or do both at the same time, I'm Google Money Smart mortgage calculator and it has a handy little tool there where you put in how big your home loan is, your current rate. You know, if you're on a 25 or 30 year term and it spits out your monthly repayments so you can have a little bit of a play. And currently Claire's looking she's probably paying about 2200 per month on her mortgage, the
minimum sort of required that would be if. It rolls off to a 6% interest rate that rises to about $3,600 and she'll be needing to find an extra $1,400 per month.
That's a lot of dough.
At the same time that you've got the childcare costs kicking in. So you know, who knows, by September, that's when she is rolling off. Having said that, you know, the 6% and the sort of, you know, what I'm on is sort of the it's the sort of top shelf or it's the one that they put you on if you've been a loyal customer for a while. It's not the really great new rates that you can get by being a new customer. And one of the it's not an endorsement, but I do like to check the
website of Tick Tock loans. TikTok. Not the dancing app. Not the dancing app. I like to check that one too. But Tick Tock is currently advertising an interest rate of variable of 4.56. So that's compared to my variable rate of 5.74, which is about 1.2 percentage points cheaper. Yeah.
So there are better deals. And if you particularly if you are locked in with one of the bigger lenders, just be aware that they're probably going to pop you on a right that is not competitive and it is definitely time to be shopping around.
My current homeland is with one of the sort of the newer lenders, the neo bank lenders, so to speak. And yeah, they're great because they don't have the overheads that the other banks do. So they can offer these really competitive rates, but they also can and like everyone's doing this because I don't know if anyone's been reading the finance reports from the banks this week. This is very business journalist, nerdy business journalist thing to do. But
apparently the mortgage market is incredibly competitive. They've been. The Bendigo Bank CEO said that it was like crazy, like she was like, I've never seen anything like this. So there are banks are out there, they are desperate for a business and they are giving big fat cashbacks like
just obscenely high, like five $6,000 in some cases. So this is something else to think about when you're refinancing, which may well be that not only can you sort of go to one of these sort of smaller lenders that might be able to give you a competitive right, but they're also then going to give you five grand as well?
Yeah, if you can handle all the paperwork involved, if you switched every six months, you could offset the impact of the higher rates by sort of getting those juicy cashbacks, although that may affect your credit rating, that you might not be able to play that card too many times. Yeah.
And with the the neobanks or the smaller lenders, it can be a little bit more tricky if you're self-employed or you've got sort of circumstances where you can't just immediately lodge the payslip to show easily he's the income. So it's not an option for everyone. But if you do sort of have the income, you can substantiate quite clearly. And importantly, if you've got enough equity in your home, which is something we might mention as well for the
mortgage prisoners out there. Do you want to explain what a mortgage prisoners?
Yes. So, I mean, you considered a very dramatic term, but you're considered a mortgage prisoner if your equity in your home has fallen below 20%, so it might not of it might have been above 20% initially when you bought the place, but the value of the property might have dropped or or anything you might have happened and
it's fallen below that 20%. So you now face lenders mortgage insurance if you refinance, which means the whole sort of process of refinancing becomes more expensive when the whole idea is that it's supposed to be cheaper. So it becomes sort of like financially unviable to leave your your mortgage, Right. So therefore, you sort of trapped in it.
Yeah. I mean, and you can if the savings on the interest was going to be very substantial, it might be worth paying the lender's mortgage insurance, which can sort of be amortized into your payments across the the length of the loan in some cases. So it's worth investigating. It's going to be a bit tricky. You know, I would say reach out to a mortgage broker or just walk into a bank in like we did in the olden days and have a chat about what your options
are and start to have that chat. I would say at least two months out from when your fixed rate is ending, you want to know from your lender what right are you going to put me on? Or at least what is it now? And you know, if rates go up, what will be added to that? So you can start to shop around and look at all those usual sites that can sort of compare the market, find a right city and get an idea of what those
competitive deals are. Because you're right, Tom, You know, we still have this vision of the banks of, you know, they're there, they're not doing deals. They're charging around high rates. But for new customers, there really are some competitive write out there. And you want to make sure that you get one of them. Yeah.
And like basically just never take anything at face value. Right? Never, never take the first number you're given, you know, when when these sort of things come along because there's almost always going to be either from that lender or a different. Linda a better offer.
Yep. And even if you don't switch, call your current lender and say, Hey, you've just put me on this vastly inflated rate. Can you can you do better place? Otherwise I will walk away, you know, to treat a mean ticket That's.
It's like in love like in finance. So sort of looking at Clare's budget in terms of things that she spends money on. Jess, you've actually identified some areas in in Claire's budget where, you know, you think she might be able to trim some costs to be able to close that gap for when she hits this mortgage cliff.
Yeah. So I think once you factor in the higher mortgage repayments and the childcare costs, we could be a little bit close and there's going to be a need to look at the more variable or discretionary purchases as we all are. And some of those things can include things like eating out. So there's a couple of hundred bucks some months for eating out in the budget or in what we're observing in the spending. For Claire, sometimes
there's Ubers, you know, going to to wherever we're going. And, you know, she's got the same problem that I've got, which is home decor, which I suspect means she's going to Kmart too much, which I used to do is you just go on a little trip and you just want some more pillows or candles or whatever it is.
So maybe there's there's a 100 or something bucks a month going on that, you know, there's there's also like a bit of skincare spending, you know, And I'm like not about about like don't spend any money on yourself, but. This is the time where we're sort of investigating the cheaper options. We're not walking into Mecca, we're walking into Chemist warehouse somewhere, not doing the top brands. We're sort of understanding a tub.
Of a tub of Vaseline. That's good for your skin, right? Yeah.
Moisture. A set of film face cleanser. I'm like, but like, we're trying. The store bought shampoos where, you know, we're not turning our nose up at some of the home brands in the cheaper options. So that's where we can just do a little bit more of the finessing, you know, around going out. And I think to be honest with you, you know, if you've got the big mortgage, it's probably going to mean I hope you had your post-COVID holiday already because we might not be having one of those
in the next year or two. And, you know, that sounds sad, but if you're looking for ways that you can cut your discretionary spending, I think that some of the big ticket items people might be just staycation ing. If you're meeting up with friends, we're going for a walk in the park. We're not going out for dinner. So some of those little changes like that just to flag that, they are things that you can tinker with and you know, in ordinary times, I'd love to see
those in everybody's budgets. But when we're battening down the hatches and preparing for this massive mortgage cliff, the big pain that is coming, there are some of the little tweaks that we can make that really do add up.
Yeah, absolutely. And that's the name of the podcast. It all adds up.
I just realized it all adds up. Mike dropped that and.
But yes, look, I think in conclusion, Clare has a very solid looking budget and she's doing a great job squirreling extra bits of cash away. But you know, these childcare costs that will be coming through the mortgage, significant increase in the mortgage repayments will be coming through will mean that she'll have to start trimming some costs here and there.
Yeah. And I would say get on that money Smart mortgage calculator today everyone, and start playing with your numbers and getting some idea of what that hit is going to be. We don't know exactly what's going to happen to interest rates, but running some scenarios and figuring out what is in my budget that can go overboard when that comes. So the key takeaways, I think for Claire, you've got those childcare costs coming at you and that is going to eat up a big chunk of your
what was formerly your savings. So just be braced for that. It won't be forever. Eventually kids go to to school and if you go to a public school, you will feel that relief of thousands of dollars a year streaming back into your budget. And again, with the mortgage cliff, you know, we've got rates going up. They won't keep going up forever. And hopefully we will get to a point where we've got on top of inflation and interest rates can start to come back down again. And that
will relieve the pressure on people. But there's definitely this pinch point coming for at least the next sort of 6 to 12 months where we will have to batten down the hatches and look at some of the discretionary spending. And I think that if Claire continues to keep a really close eye on her expenses, that that she'll be well equipped to do that.
Thanks, Clare, for calling in with your budgets and some questions. We loved hearing it and thanks everyone else who's been sending in their their budgets and questions. It's been great to read. We're working through it slowly. And you know, you'll be hearing someone new next week with with some more questions about a whole bunch of different stuff. So thanks so much for listening, as always. And we will see you next week.
Thanks for listening. See you next week.
This episode of It All Adds Up is produced by Chee Wong. The information discussed is general in nature and does not take into account your personal financial situation, goals or objectives. You should always do your own research or get professional advice before making any major financial decisions. If you'd like today's episode, hit follow a new podcast app. Leave a review and recommend it to all your friends. You can also submit your list of questions in text
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