Your Financial Questions, Answered: August '19

General

Recent financial news has had many experts scratching their head and wondering what the future of Australia looks like.

With the RBA official interest rate cuts affecting multiple aspects of Australia’s financial landscape, there have been a number of changes that may affect you and your financial goals.

So, in order to help you understand these changes and their implications better, we’ve taken the time to break down some of the most heated topics potentially affecting your financial world in this Q&A.

The questions and topics we cover in this Q&A include:

The recent interest rate cuts and what they mean for you
Whether to keep or sell your current property when purchasing another

What The RBA’s Official Interest Rate Cut Means For You

On the 2nd of July 2019, the board of the Reserve Bank of Australia (RBA) voted to officially cut the cash interest rate by 0.25 percentage points to 1%, a historic low for Australia. This was following an earlier cut in June, which marked the first change in official interest rates in nearly three years.

The idea behind this cut was simple: to help boost a struggling economy and property market and make it easier for younger Australians to achieve their home ownership goals. The big four banks jumped on board with this idea shortly after it was announced, promising to reduce their standard variable rate loans for owner-occupiers paying principal and interest by varying degrees.

But while the big four banks have agreed to pass on the interest rate cuts in some form to their customers, the same can’t be said for every other financial institution. If you have a home loan and would like a lowered rate, whether you’ll be eligible to receive this will depend largely on which lender you’re with and the fine-print of your loan agreement.

Like many aspects of your financial world, what the interest rate cuts mean for you will be different depending on your personal financial circumstances and goals. There are some clear winners of the cuts, such as those who currently have a loan with a bank which has promised to pass on the benefits of the cuts or those seeking to purchase their first home. But there are also those who may find the interest rate cuts a challenge, such as those with large amounts of savings in cash or term deposits or those with fixed rate loans.

Your Interest Rate Cut Questions Answered

Q - I already have a mortgage, how do the interest rate cuts benefit me?

If you have a variable-rate loan, the RBA’s recent cuts may come as very good news. With a variable-rate loan, you are better positioned than those with a fixed-rate loan to have the interest rate cuts passed on to you from your bank. With a lowered interest rate making your monthly loan repayments more manageable, there may be more room in your budget to put towards achieving your financial goals in other ways.

However, ensuring that the benefits of the interest rate cuts are passed onto you will come down to persistence. While the big four lenders – namely ANZ, Commonwealth Bank, NAB and Westpac – have promised to pass on the cuts in some degree, not every financial institution has followed suit. If you believe that you may be entitled to a lowered interest rate, let your financial advisor know and we can give you a better idea of if this is the case and what your new interest rate may be.

Already received a lowered interest rate? Your financial advisor can provide you with guidance on how you can use the extra breathing room in your budget to achieve financial security and success. All you have to do is get in touch.
Q - I want to buy my first home. Should I do it now while rates are low or wait?

For those of you seriously considering buying your first home, a lower official interest rate may make breaking into the property market more achievable than it previously was. It does this by potentially making your future mortgage repayments cheaper, meaning you may be able to pay off your home quicker and start growing your wealth.

A lowered interest rate also means that lenders should become more competitive in their offerings, as they look to maintain their profit levels by recruiting new customers. Together, these aspects make the immediate future a fortuitous time to be considering purchasing a first home.

But for those of you thinking of purchasing a home and locking in a fixed-rate loan, it may be time to reconsider. While it might seem sensible to lock in an interest rate while they are at historic lows, it is possible that interest rates will drop again in the long run, which could leave you in a worse position with a fixed-rate loan.

Your financial advisor can work with you to decide whether it is the right time for you to purchase a home and, if so, which loan option is the right fit for you.
Q - Will the interest rate cuts affect my investment strategy? How?

Despite popular belief, investors in Australian shares and high-grade bonds are usually one of the early receivers of the benefits of an interest rate cut. Lower interest rates typically lead to consumers and businesses increasing their spending and investment as cash savings options become less beneficial – all of which leads to an increase in share prices.

We believe that an essential part of any successful investment strategy is diversification across a number of different asset types according to your risk profile and financial goals. With a lowered interest rate making both the property market more accessible and shares more profitable, any investment strategy invested across the Australian market should be on track to help you achieve your financial goals.

But, this being said, the interest rate cuts also mean that the income yield on defensive assets, such as cash or fixed-interest term deposits, will be much lower than previous years. This may prompt some of you to undertake a more aggressive investment strategy, which unfortunately brings with it a higher level of risk, in order to ensure you’re able to secure an equal amount of investment yield.

If you’re concerned about whether this may be the case for you, or any aspect of your investment strategy, your financial advisor can help you assess your current position and adjust your strategy to accommodate the interest rate cuts while ensuring you’re still able to achieve your dream financial future.

Whether To Keep or Sell Your Current Property When Purchasing Another

Whether your family is expanding or you’re looking to make the next move up the property ladder, purchasing a new property can present a unique challenge: what do you do with your existing property? While selling your current property and using the proceeds of this sale to purchase your next home, which in turn will leave you with a smaller loan and less debt, may seem like the obvious choice, there are other options available to you.

Purchasing another home can present a great opportunity to start building a property portfolio by turning your existing property into an investment property. This is especially true if your home is in an area considered attractive to potential renters and is close to amenities such as public transport, shopping centres and schools. However, both options for what to do with your current property when purchasing another have both pros and cons that require careful consideration.

Your Investment Property Questions Answered

Q - I want to sell. What are the benefits and downsides?

The main benefit of selling your current property before purchasing another is that you’ll end up with a solid idea of how much you can afford when it comes to buying your next property, based on the selling price of your original property. Selling your existing property also means you’ll be looking at a smaller loan for your next property than if you decided to keep your original.

Both of these benefits are particularly suited to those with a low appetite for investment risk, as selling your current property allows you to move forward in purchasing your next property with a full knowledge of your financial status.

However, selling your existing property means that you won’t be able to take advantage of the number of financial strategies available to those with an investment property. These include debt recycling, which allow you to pay off any outstanding loans on both of your properties quicker but with more risk involved, and negative gearing, which can help you lower your tax bill if there is a gap between your rental income and your loan repayments.

If you have a larger income or are more comfortable with risk and would like to kick-start your investment portfolio, selling your current property may not be the wisest option for you.
Q - I want to keep my current property as an investment. Is that a good idea?

We mentioned it above, but keeping your existing property as an investment property has a number of benefits for those of you seeking to grow your investment portfolio or lower your tax obligations. Keeping your current property also gives you the opportunity to earn ongoing rental returns as well as capital gain over time, meaning that you’ll be earning income from your rental returns while still maintaining the possibility of selling your investment property in the future.

But, if you do intend to sell your investment property in the future, it is important to first speak to your tax advisor about the potential capital gains tax (CGT) bill you may have to pay. Currently, the ATO considers all properties not registered as your primary place of residence for more than six years to be an investment property and thus is subject to CGT should you wish to sell it.

If you’d like to keep your existing property, it’s also important to consider the viability of your property as an investment property. When you first bought your home, it’s likely that your priorities were focused more on finding a place that suited you and your loved ones’ preferred lifestyle.

A rental property has a different set of desirable characteristics that would be appealing to a wider rental audience, such as being close to public transport, schools or universities and shopping centres.

How attractive your property is as a rental property has a direct impact on your potential rental yields and so should be discussed thoroughly before making any decisions about whether to keep your property or not.

I’m still not sure whether I should keep my property or not. What should I do?

Don’t worry, that’s what we’re here for.

Your financial advisor can work with you to discuss your options and decide on the right course forward for your particular financial circumstances and goals.

Remember, expert financial advice and guidance – tailored specifically to you and your financial needs – is only a phone call or email away.

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