5 People That Lose the Most from an Interest Rate Cut

Not everyone is better off when interest rates fall. Find out which Australians will be the biggest losers from the latest cut to official interest rates.


First-time home hopefuls


Interest rate cuts typically stimulate consumer spending, especially when it comes to property market. Lower interest rates are often a sign of encouragement to seasoned and first-time home buyers alike. With cheaper loans and a boost in confidence, first-time home buyers can expect to pay less for mortgages and free up more disposable income.

With the boost in the property market during this period, first-time home buyers will have to contend with the rising demand and growing competition, making it tougher for them to buy.


Risk averse investors


What is a ‘risk averse investor’? This describes an investor who prefers low risk investments like term deposits.

So, how will the current interest rate cut affect risk averse investors?

To simply put it, low risk investments will have lower returns. As interest rates falls, so will term deposit rates. This will have a significant impact on investment portfolios. Baby boomers transitioning into retirement could be faced with a decrease in income and lowered term deposit rate.


Importers


The Reserve Bank of Australia (RBA) adjusts interest rates to control economic growth and inflation. With interest rates and the Australian dollar closely tied, it is expected for the Australian Dollar to fall with the interest rate cut. The reason why this happens is because overseas investors will look elsewhere for a better return rate, which reduces the demand for Australian Dollar, causing it to fall.

When the Australian dollar is low, it drives up the cost of imported goods. For instance, if an importer is unable to sell the products to a wholesaler or consumer at the increased new cost, the importer will have to accept lower profit margins.


International travellers


As the Australian dollar heads lower, it will also affect the cost of international travel. Jet fuel prices will increase, which means more expensive airfares, tours, cruises and even the cost of an Airbnb stay will surge.


Everyone else!


Almost everyone in Australia has a banking account that earns interest. It could be your transactional account that you put your wages into or an online saver. All these accounts earn less interest when there is an interest rate cut.

Should I Have Fixed Rate, Variable Rate Or Split Rate?

That depends on who ‘you’ are.

When you take out a mortgage or home loan, you can choose to have an interest rate this is fixed, variable, or split (a combination of the two). There is no right or wrong option – it all depends on your circumstances.

Fixed rate home loans

With the fixed rate home loan, the interest rate on your mortgage doesn’t change for an agreed period (usually 1-5 years) – no matter what happens to official interest rates.

Variable rate home loans

With the variable rate home loan, the interest rate on your mortgage can change. If official interest rates go down, your interest rates go down too. However, if the Reserve Bank increases interest rates, your home loan rate will probably rise too.

Split rate home loans

A split rate mortgage combines elements of the fixed rate and variable rate options. e.g. You can have 80% of your home loan at a fixed rate , while the remaining 20% is at an interest rate that varies with the market.

Which home loan interest rate option is best?

Because it is absolutely predictable, the fixed rate home loan can give you greater confidence that you can meet your mortgage repayments regardless of changing economic conditions. The disadvantage is that it generally lacks flexibility.

If official interest rates fall, the variable rate home loan can save you money, but you need to consider the risk that your mortgage payments could rise in the future. If you are contemplating a low introductory or honeymoon rate for an initial period you will save initially, but you must find out what the rate will be when the ‘honeymoon’ is over. The lowest initial interest rate doesn’t always mean the better deal.

The split rate home loan gives you some of the benefits of both fixed rate and variable rate loans. You won’t save as much as a full variable rate loan if interest rates fall, but neither will you be as exposed if interest rates rise.

Winners and losers : Budget 2016

Winners

  • Businesses with a turnover up to $10 million will pay a reduced company tax rate of 27.5 per cent.
  • Businesses with a turnover up to $100 million to gradually receive 27.5 per cent rate by 2020.
  • All businesses to receive reduced company tax rate of 27.5 per cent by 2024 and 25 per cent by 2027.
  • Unincorporated small businesses with a turnover less than $5 million get a tax discount of 8 per cent.
  • Businesses with a turnover up to $10 million receive $20,000 instant asset write off, expiring in June 2017.
  • People earning more than $80,000 receive a tax cut of up to $6 per week as the middle income tax threshold is increased.
  • Earners over $180,000 will see the Budget Repair Levy end as scheduled in June 2017.
  • People earning up to $37,000 won’t lose a tax rebate, capped at $500, on their contributions.
  • University students will not have their fees deregulated after the policy was officially dumped.
  • Schools get $1.2 billion in extra funding over three years from 2018 – less than Labor’s promised $4.5 billion.
  • Disabled students receive $118 million in funding for extra support.
  • State and territory hospitals receive $2.9 billion in additional funding between 2017 and 2020.
  • People with a disability will benefit from welfare budget cuts invested in a new NDIS savings fund.
  • Young unemployed offered training and internship programs, with rewards for the employers, under $750 million employment package.
  • Second Sydney airport at Badgerys Creek receives $115 million.
  • Inland rail project between Brisbane and Melbourne receives $594 million.
  • Sydney Metro rail project receives $1.7 billion from asset recycling fund.
  • Melbourne Metro rail project receives $857 million from asset recycling fund.
  • Parramatta light rail, regional road and freight corridors, NT flood mitigation receive grants from asset recycling fund.
  • Defence building projects get $195 billion over 10 years including submarine, frigate and patrol vessel construction.
  • Defence force gets $351 million for one year’s maintenance of the fight against Islamic State.
  • Australian Federal Police and Australian Crime Commission funding boosted by $153 million for security amid terrorism fears.

Losers

  • Multinational corporations will face a diverted profits tax or “Google tax” of 40 per cent on income they attempt to shift offshore and will be policed by a 1000 member taskforce in the ATO.
  • Banks to sacrifice $121 million to fund corporate regulator ASIC under user pays model.
  • Smokers face four 12.5 per cent increases in the tobacco excise, a policy the government copied from Labor and Tony Abbott attacked as a “workers’ tax”.
  • People with super balances over $1.6 million can no longer roll all savings into retirement funds with tax-free earnings.
  • People earning between $250,000 and $300,000 a year pay double the rate of tax on their super contributions.
  • Transition to retirement pension account holders have tax “loopholes” tightened.
  • Wealthiest 4 per cent forecast to be hardest hit by package.
  • Universities will still be hit with a 20 per cent funding cut, originally proposed as part of fee deregulation package.
  • Aged care providers to lose more than $1 billion in funding for complex healthcare over four years.
  • Doctors: Medicare benefits schedule frozen for three years.
  • 90,000 disability support recipients will have their payments reviewed to assess capacity to work, with 30,000 undergoing medical assessment.
  • Family tax benefit recipients still face tightening of the payments as the government persists with savings held up by the Senate.
  • Parents will wait until 2018, one year later than scheduled, to receive childcare subsidies funded by FTB changes.
  • Businesses: Subsidies for employing young people tightened.
  • Unemployed: Some Work for the Dole recipients will see payments restricted.
  • New welfare recipients will not receive Carbon tax compensation payments.
  • Victoria gets less than 10 per cent of national infrastructure funding averaged over four years

 

Source: Sydney Morning Herald

Investment plan

What Comes First: The Property Or The Loan?

What Comes First: The Property Or The Loan? It’s easy to get carried away with the fun part of buying a property – looking at houses – but delaying the less compelling task of arranging finance will weaken your negotiating position on both the property and the loan.

Looking for a property to purchase is an exciting time. Choices regarding location, size, number of rooms and local amenities often see house hunters carried away in a deluge of daydreams and anticipation.

But, before you get carried away, it’s important to check off the essentials first. Although organising your finances may seem drab in comparison to perusing sales listings, gaining pre-approval with a lender will give you confidence about how much you can afford to borrow.

“First and foremost you need to determine if you’re eligible to borrow money from a lender,” “Your ability to repay the loan will need to be assessed – you don’t want to find out after you’ve [made an offer] that your credit history or deposit is not up to scratch.”

Arranging finance before finding the perfect property will put you in a good position when it comes time to make an offer. When you do find the house you have always wanted, you can present to the seller and estate agent as a prepared applicant who is serious and reliable.

“It shows you mean business, and gives them peace of mind that your financing will not fall through. Don’t be afraid to let the selling agent know you have conditional loan approval in place,”

Sellers are most interested in completing their sale fuss-free and with steadfast funding, and showing that you are capable of both will help put you at the top of a potentially competitive list of applicants.

In the instance that you find and secure purchase of a home without having your loan pre-approved by a lender, there are a few pitfalls that you risk running into.

“If you don’t have financing to pay for your property, you run the risk of forfeiting your initial 10 per cent non-refundable deposit you need to put down to secure the property. This may differ depending on what state you live in, but the point is it always pays to be organised and have pre-approval in place,” .

Saving home loan applications to the last minute also leaves less time to find the most suitable loan and have it approved ahead of settlement.

“Arranging financing as an afterthought also adds immense pressure to the process of shopping around for the right loan and gathering the paperwork to prove you can service the loan,” .“You don’t want to rush this process.”