How our interest rate obsession harms us

Monday, 21 October 2024

Katie Wesney is a financial adviser at enable.me.

OPINION: “It’s impossible to get ahead right now, interest rates are too high. We’re surviving till ‘25,” declared a middle-aged professional couple in my office this month.

Respectfully, I disagree.

If that was true, the reverse should have also been true a few years ago when interest rates were 2-3% and conditions were favourable. We all would have been paying down our mortgages at a rate of knots and sailing ahead financially - but we weren’t.

We were spending more money on lots of things – just not the mortgage.

For most of us it was cars, spas, holidays (when restrictions permitted) and home improvements. We were busy inadvertently helping release the inflation genie from her bottle by opening our wallets to spend all that excess cash we weren’t paying to the bank.

In the process we were - ironically - forcing the Reserve Bank’s hand to increase interest rates to try and curb runaway price increases.

I was asked recently if I had some magic financial tricks up my sleeve that I could share. Sadly, there are no tricks, just key financial principles.

The deeply unsexy truth is that as part of getting ahead, you need to get yourself on the property ladder and then you must pay that mortgage off - the faster the better.

At every OCR announcement, we hold our breath and obsess over how this will affect us and if we should fix our mortgages and if so for how long. Of course, October’s 50 basis point cut was a welcome relief, and we’ve got one more announcement in November before we close out the year.

However, what I have repeatedly observed is that low interest rates do not have a strong correlation to personal financial progress.

It frees up cashflow for sure – so if there was a trick, it would lie in how you can channel that cashflow as productively as possible for you and your family to get ahead.

I’m oversimplifying it - but fixating on rates and playing the banks off against each other is most certainly not the ‘secret sauce’.

The interest rate you pay is obviously important, but only to a point - there are lots of other things that need to be weighed up, including your mortgage structure, strategy, cashflow, flexibility, resilience and certainty of income.

The sobering truth though, is if interest rates dropped from 6% to 5% on a $500,000 mortgage with a 30-year standard term, your repayments would drop $73 per week, saving you $3796 per year. Helpful, but not revolutionary.

Whereas if you can shave 10 years off that initial term (even at 6%) you’ll save yourself $219,588 in interest you don’t have to pay back to the bank. That’s a game changer in terms of choice and security.

I find most people waste their time fixating only on interest rates – which not only have a small impact but are entirely outside of your control.

I choose to focus on the hundreds of thousands of savings, because that’s where you can change the game. Otherwise, you risk being back in the same position next time interest rates swing back the other way.

You might be thinking, “Shaving 10 years off my mortgage sounds great, but how do I do that?”.

Well, just like when you start building a house, you should start by strengthening your foundations. That foundation is built on cashflow, which is as simple as cash in, cash out - and what’s left over. That’s the key bit – you need to maximise what’s left over.

If you don’t have anything, that’s clearly unsustainable and you must fix it immediately. You’ve got two levers to achieve that - earn more or spend less (or both).

How you do that starts by having hard conversations, understanding where you are currently at, where things are going awry and the options available to you to improve your trajectory.

The bottom line is to pay back a mortgage faster you have to have money left over to do so at the end of every pay. Focus here first, controlling what you can, rather than focusing solely on the outside forces that direct interest rates.

I’ve been working as a financial coach for the past decade, and this is fundamental to strategy design. I’m a working Mum with three school-aged children, a qualified financial advisor, a chartered Accountant and I’m obsessed with the tools, psychology and strategies that get people ahead.

I believe plain and direct language is important in this conversation – there is little point in sugar-coating it or speaking in financial code.

If you work hard, you deserve to make the financial progress - but it's by no means a given.

It is, however, entirely possible - and by addressing the issues we all face every day I intend to focus this column on how you make it your reality.