In a recent speech to economists in Brisbane, Philip Lowe the governor for the Reserve Bank of Australia (RBA) provided the strongest indication yet that the historically low interests could be cut further based off lower than expected inflation growth.
“A lower cash rate would support employment growth and bring forward the time when inflation is consistent with the target,” he said – source https://www.abc.net.au/news/2019-05-21/reserve-bank-poised-to-cut-interest-rates-in-june/11134160
What does any of that mean and how does it affect you?
The RBA are concerned that Australians are doing it a little too tough at the moment and want to free up a little more of your cash that would normally be paid in interest so that more of your cash can be spent in Australia.
For example, if your interest rate of 4% on your $400,000 mortgage fell by 0.25% then you’d have an extra $1,000 in your pocket to spend each year.
So, by this point you’re probably thinking, “Phil you’re my hero how can I get my extra $1,000/year?”
There are some disadvantages that need to be considered with interest rate falls.
With any interest rate fall, there is also a fall in your earnings from savings. For example $100,000 in the bank may only pay $1,250/year instead of $1,500 or more.
Falls can be good for households and business, allowing there to be more cash flow. However retirees, people saving for a home or anyone else who doesn’t have a mortgage or a business will ultimately be disadvantaged.
So who else is disadvantaged? … practically everyone.
A portion of just about everyone’s superannuation will be invested in term deposits, bank accounts and other interest earning accounts. Typically, as you get older super funds increase the amount of your super that is invested in these accounts as these cash-type investments are seen as less risky. In a low interest rate environment, returns on superannuation will be less and the longer they stay lower the less you’ll ultimately have in superannuation by the time you retire.
I don’t want to have less when I retire, what can I do about this?
- Paying down debt on your mortgage is one of the best ways, the sooner you can pay off the house, the more you can put into super later down the track.
- Increase your contributions to super, this can help cover the fall in earnings.
- Purchase other investments, consider your options to purchase property or shares to help bolster your retirement savings.
- Buy more shares and take more risk with your super.
Looking at all of your options and assessing the best path to go down is the role of a financial adviser.
If you’d like to make an appointment to discuss your options, please call our office on 07 5451 0022 to organise your complimentary appointment.