How do you rate?
The Reserve Bank cash rate has hovered at 1.5 per cent since August 2016. This rate has more-or-less translated to a standard variable rate among the banks of around 4 - 6 per cent depending on your lender. But with today’s RBA’s cash rate decrease of .25 basis points, and another .25 basis point decrease predicted before Christmas (most likely in October/early November), could you be doing more to make the most of it?
The spare change you’ll have from saving an extra .25% on your loan now (assuming the banks pass on the full rate cut), plus another .25% before the end of the year, along with an expected boost to your tax refund between September - December, thanks to the newly re-elected Coalition Government’s proposed tax offset (expected to receive bi-partisan support - which will deliver up to $1080 for people earning less than $90,000) means you’ll have a nice little windfall burning a hole in your pocket in the next few months.
So what to do with all that extra money?
Holiday to Bali? New wardrobe? A new set of golf clubs?
Perhaps - but don’t be so hasty to spend it.
Let’s be honest - spending is what the RBA and the Government want in order to drive increased growth (anyone remember KRudd’s direct-deposit cash handout during the last GFC?), and lift the economy out of the funk we’ve found ourselves in.
But is that what’s best for YOU?
Only you know the answer to that, but here are some alternatives you might want to consider before sizing up that new Taylor Made driver.
First Home Buyers
There hasn’t been a better time in the last decade to be a First Home Buyer (FHB). Despite banks tightening their lending criteria, record low interest rates are a wonderful gift and those that have been planning, saving and are adequately prepared with even a modest deposit are in a good position.
The other side of the coin to declining house prices for some is an improvement in housing affordability for others.
House prices in Australia’s 2 major cities are now at the same level they were in late 2015/early 2016. Both State and Federal Government’s offer a comprehensive package of grants, concessions and exemptions to improve housing affordability.
In addition to those measures, the Coalition Government has bi-partisan support for a plan to help FHB’s save for a deposit, based on a scheme already operating in New Zealand.
Under this new scheme, FHB’s would only need a 5 per cent deposit — instead of the usual standard of around 20 per cent with the Government guaranteeing the additional amount needed to reach the 20 per cent threshold, which it says would allow borrowers to avoid paying thousands of dollars in mortgage insurance.
Graham Wolfe from the Housing Industry Association said “there are many people who should be able to afford a mortgage but struggled to save enough for a deposit while also paying rent.
They've already got a savings record to the extent that they've been paying a rental accommodation, so I think they've shown their capacity to service a loan,"
So if you’re a first home buyer, maybe think about adding that little extra money to your deposit. While it may not seem like a lot, now might be the time to pull the trigger on a purchase, and with these incentives, it will give you a significant leg up getting onto the first rung of the housing ladder.
Prior to today’s rate decrease, the RBA had been telegraphing the message to bank bosses that — “if we cut rates, you'd better pass it on”. Coalition Treasurer Josh Frydenberg echoed the RBA’s sentiment this morning, stating "I expect all banks to pass on the benefits of sustained reductions in funding costs".
Their thinking behind this is that the rising funding costs that triggered independent mortgage interest rate rises from most banks last year have disappeared. So the expectation on rate cuts, when they happen, is that the banks won’t hold back.
For investors on variable rate mortgages, this announcement should be music to your ears.
A .25 basis point decrease on the national average loan amount of $400,000*, equates to a saving of almost $60 a month, or just over $700 a year.
Factor in the predicted additional .25 basis point decrease before the end of the year, and you’re looking at some serious savings on what you’re currently paying.
So what are your options?
1. Continue to pay the amount you were paying prior to the interest rate cut.
Paying an additional $700 a year off your mortgage* will save you $21,428 over the life of the loan, and reduce the total loan period by almost 2 years. Add in a further .25% interest rate decrease before the end of the year, and you can up that saving to $39,984 and almost 4 years off your loan. Not bad….
If you’re worried about needing some of that money for a rainy day, and you have an offset feature on your account, you can always put the difference in the offset in case you need it.
2. Refinance your existing loan.
If you’ve been looking for a more competitive rate with additional increased loan features from your lender, then this is the perfect opportunity to put them on notice. Re-negotiating with your existing lender or refinancing can give you a better deal, as long as you make sure there’s no hidden costs and your new loan is structured properly. With experience negotiating with a panel of 45+ lenders, I can assist in helping you do better with your current lender, or to navigate the process and find the most suitable loan to suit your circumstances.
3. Bump up your super contribution
Adding $700 a year in additional contributions to the average Australians** super yields a similar result, boosting your super balance a healthy $21,967 by the time you’re ready to retire. Again, factoring an additional rate cut of .25% before Christmas, and your balance will improve by almost $44,000 ($43,934) by retirement.
APRA proposes amending guidance on mortgage lending
In continuing good news, news surfaced last week that the Australian Prudential Regulation Authority (APRA) had begun consulting on possible revisions to its serviceability assessments for residential mortgage loan applications.
The move by APRA would represent a substantial easing of credit standards for new borrowers, and could see the borrowing capacity of home buyers increase by as much as 10 per cent.
Any way you slice it, a rate cut is good all round. And two before Christmas even better if it eventuates. How you make the most of your savings is up to you. If you’d like to know more about negotiating a more competitive rate with your lender, or the other options I’ve mentioned above, contact me to book an appointment and we can talk about what we can do based on your situation.
Otherwise, maybe spending it on a holiday isn’t such a bad idea. After all, you’ve earned it.
*Based on a $400,000 home loan over 30 years at 4.36% average variable interest rate and LVR of 80%.
** Based on average age of 37, median wage of $55,063 p.a, and average super balance of $64,590.