The Reserve Bank Interest rate is now at an all-time low. Not all banks have passed on the interest rate cut, but we expect interest rates to go lower a bit further.
Several clients are now asking us these particular two questions:
- Are rates going lower, or are they going to stay that way for some time?
The Reserve Bank has recently indicated that interest rates are likely to be cut lower by them. That doesn’t mean that all banks will pass on the interest rate cut, as other things are going on in the background of banks. The Government Regulator, APRA, has been setting higher lending standards. That means it is harder for banks to lend, which in turn means that they may not pass on the whole interest rate cut. Interest rates as a whole are likely to go down, or at least be maintained at these current levels.
- Should I fix my Home Loan?
As a general rule, we don’t like to fix home loans, as it is a gamble as to whether interest rates go up or down. We find that a lot of people try to chase the interest rates because the interest rates are low. When the banks are trying to lock the interest rates away for their profits, sometimes interest rates can fluctuate up or down, and as such, we prefer to have variable rates.
Also, fixed loans generally only allow you to pay an additional $10,000 per year off the loan without being charged an early payout penalty. You should check your contract and confirm this with your bank before you lock in a fixed interest rate.
Tax Planning & Investment Loans
For investment loans and tax planning, we will consider using an interest in advance strategy. That strategy requires you to pay a whole year’s worth of interest in advance, so to calculate the interest rate at the time of funding, you are fixing the interest rate.
Also, by fixing your interest rate for your investment loan, and leaving your home loan variable, you can work on paying down the home loan debt as there is no tax benefit.
Things to Consider
If you do decide that you want to fix your interest rate we recommend considering the following:
- If you set an interest rate, then consider locking in an interest rate for a period of time (say 2 years or 3 years) and then at the end of that term you fix for the same period again years so that you are not getting in a position where you lock your rates for too long or too short.
- Consider a mix of variable and fixed interest, so that you can blend the benefit of a fixed rate that is not going to go up, with the ability to pay extra money off your home loan, and to take advantage of the interest rates if they do go down.
- Interest-only versus principal and interest so that you can look at the cash flow for fixing your loan, and maybe do that loan as interest only, and pay any additional capital off your variable loan.
We always recommend taking advice before you do anything and consider your overall financial goals, your tax structure, and your cash flow and income to make an informed decision.
If you have any further questions regarding this matter, please contact us on (08) 9227 6300 or email .
Important information and disclaimer
This publication has been prepared by AustAsia Group, including AustAsia Finance Brokers Pty Ltd (Australian Credit Licence No 385068) and AustAsia Real Estate Pty Ltd (REBA Licence No. RA1736).
Any advice in this publication is general only and has not been tailored to your circumstances. Accordingly, reliance should not be placed on the information contained in this document as the basis for making any financial investment, insurance, or other decision. Please seek personal advice before acting on this information.
Information in this publication is accurate as at the date of writing, 5 August 2019. Some of the information may have been provided to us by third parties. While it is believed the information is accurate and reliable, the accuracy of that information is not guaranteed in any way.
Opinions constitute our judgement at the time of issue and are subject to change. Neither the Licensee nor any member of AustAsia Group, nor their employees or directors give any warranty of accuracy, nor accept any responsibility, for any errors or omissions in this document.
Any general tax information provided in this publication is intended as a guide only and is based on our general understanding of taxation laws. It is not intended to be a substitute for specialised taxation advice or an assessment of your liabilities, obligations or claim entitlements that arise, or could arise, under taxation law, and we recommend you consult with a registered tax agent.