Variable mortgages will hit many countries hard

Last post, I mentioned how our student loans were at a breakeven point due to rising interest rates. That’s bad, and the Biden administration has gone to the Supreme Court to show its plan is legal. Public student loans are deferred from payment until June 2023, or 3 months after the Supreme Court reaches a decision. The Supreme Court is expected to hear this case in February 2023.

This is a first step in addressing a student loan crisis where many take out heavy loans for deadbeat colleges, many times without getting a degree or a job in their course of study.

Variable rates don’t apply to student loans. Many countries outside the US use variable rate mortgages which reset every five years. See this great graphic from Axios.

For example, the Reserve Bank of Australia did a sensitivity analysis showing that a 2.5 percentage point hike in rates caused an Australian family, with typical income and mortgage debt levels, to see monthly spare cash flow drop 13%.

Axios

Imagine inflation rising, making normal goods and services more expensive, and seeing your spare cash flow drop by 13% because central banks raised rates on your mortgage. It speaks to the fact central banks are limited on dealing with pandemics, wars, supply chain disruptions, climate change, and labor shortages. Forget about the pain if your income is lower than average.

Here’s another quote, showing the impact on the UK.

What to watch: The problem may be most acute in the U.K., where rates recently soared amid broader market fallout from the failed tax cuts proposed earlier this fall. 

• “A huge share of the tightening that the central bank executes will run through a massive income shock to 4 million or so households, on top of the cost-of-living crisis,” says Guha. She estimates the total number of mortgage holders on a variable-rate or a two-year fixed mortgage is 4 million.

Axios

If you are impacted by variable rate mortgages, let is know in the comments. How are you addressing inflation and higher mortgage rates?

In solidarity.

Sincerely yours,

smilingdad

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