We are all aware by now that the RBA has decreased the official cash rate to a historic low of 1%. As you can see from the chart above, the cash rate has never been lower.
Most of the banks have passed this cut on and you may have noticed your mortgage repayments are now less, if you have cash in the bank or a Term Deposit (TD), your returns will have also reduced. In fact, retiring and living off TD returns is no longer an option for the vast majority of retirees or anyone looking to retire in the next 5-10 years.
What does this mean for you?
Below we have a few tips to consider depending on your circumstances. Of course if you need help with anything mentioned below please contact us.
If you have a mortgage.....
Make sure your lender is giving you the best available rate, you shouldn't be paying more than 3.80% for a variable mortgage. Some nonbank lenders are offering rates as low as 3.20%. Once you have the best rate, don't reduce your monthly payments. If your old repayment was $3,000 per month and your lender reduces your payments to $2,750....Keep paying $3,000 per month! This may be a once in a generation opportunity to pay down debt quicker, which will save you tens of thousands of dollars in interest. Your future self will thank you!
If you are retired or retiring....
It is still possible to get a TD rate of 2% for 12 months. But even if you have $500,000 this is only $10,000 of interest and only just outpacing inflation. If you are able to take on a little more risk, consider shares with a dividend paying focus or a managed fund that specialises in producing income. Our portfolios for retirees include one such fund that has generated 16.4% of income for the last 12 months! So low interest rates are not the end of the world for retirees, but you may need to reconsider your strategy and reliance on TDs.
In summary, low interest rates are probably going to be around longer than we expected. For those with debt, the next few years are an opportunity to really set yourself up financially by reducing your liabilities and saving interest. I urge you to contact us if you need help, we can refer you to a mortgage broker for the best rate and help you pay off your mortgage quicker by making extra repayments.
If you are worried about retirement, again talk to us and we can show you strategies and other options to ensure an adequate income.