How to time rate cuts perfectly

I have no idea how to achieve that subject line and no one does, but many people will tell you they can.

Truth is, no one knows what is around the corner.

I bet this weeks open rate is higher than last weeks Part 1 of preparing for rate cuts though.

Last week we explored the excitement that interest rates may come back down.

I stressed not to get excited too quickly. This is because we want to understand how this will impact us, what it means and then to act proactively, not reactively.

I really hope last week and this week get you thinking and i've included some podcast listening too with a mortgage advisor (Mikey).

We are already seeing some banks decrease their interest rates and the Reserve Bank hasn’t even started cutting the Official Cash Rate (OCR).

As the OCR heads down, this will have different implications for everyone.

Savers, borrowers and investors will all be affected.

Examples from last week:

? Lower mortgage payments

? Refinancing opportunities for some

? Decrease in income for term deposit holders and savers

? Asset prices may increase providing leverage options

? The cost of servicing debts, such as personal loans, credit cards, and auto loans may come down

? Businesses may see cheaper financing costs

Let’s explore some of these in a bit more detail.

Lower interest rates generally lead to lower mortgage payments. This can free up cash flow for other expenses, debt reduction or investments. Start thinking about that now, not when you lock in your next rate. How will you allocate that cash?

Refinancing opportunities. Reduced rates may make refinancing an existing mortgage to a lower rate an attractive option, potentially saving thousands over the life of the loan. BUT you need to understand break fees and speak to a mortgage advisor or bank about YOUR options + implications + risks. There can be large fees when breaking a mortgage contract.

Debt servicing. Lower interest rates can reduce the cost of servicing other debts, such as personal loans, credit cards, asset and car loans. How will these impact you? Can you clear some of that debt faster? Lower interest rates MAY mean you can borrow more too, tempting you to take on debt or spend more with a higher pre-approval.

Now let’s explore some very generic action Items we can all think about if we have various forms of debt.

Note: these are designed to get you THINKING only and are not financial advice:

? Review existing mortgages: compare your current mortgage rate with the new lower rates. Know when your mortgage rates are up for renewal or to be re-fixed and seek advice.

? Consider refinancing: if there’s a significant difference, refinancing could lower your monthly payments or shorten your loan term. Again, you need to check how viable this is for you. I.e. calculate costs: ensure the savings from lower rates outweigh any refinancing costs (e.g., break fees, penalties).

? Debt consolidation: (take a look at your high-interest debt) with lower rates, consolidating high-interest debt into a lower-interest loan could be beneficial. Rates are always moving, remember this.

? Personal loans: explore personal loans with lower interest rates to pay off high-interest credit card debt that might have snuck up on you - again, not financial advice but something to get you thinking.

? Explore options & opportunities for credit card balance transfers also. See what banks are doing in this space as interest rates decrease.

? Emergency fund: what about using the additional cash flow from lower mortgage payments to re-build your emergency fund?

? Investments: consider investing the savings in retirement funds, stocks, KiwiSaver or other investment opportunities that align with your financial goals.

? Analyse terms and rate options: I.e. consider how your circumstances have changed and will change in the coming 48 months. Discuss this with a mortgage adviser around what mortgage suits your situation. You might even want to discuss a fixed-rate vs. a variable rate if your circumstances are changing in the coming months or years. Perhaps you’re coming into money? Perhaps you can offset some debt with funds of a family member (google this).

? Budget adjustments: adjust your budget to allocate the savings from reduced interest payments towards other financial goals like debt repayment, savings, or investments.

? Update your outgoings: map out how your decrease in interest rates will impact your monthly cash flowing through your household.

Sheeeesh there is a lot to think about all of a sudden.

Safe to say that the mortgage and financial advisers are going to be very busy as rates drop.

People will want personalised advice based on their specific financial situation and market conditions.

I don’t blame them when things have been so testing and volatile recently. Who's going to be confident enough to make these decisions on their own? Probably not many people.

Now, for some of us with term deposits, we need to be thinking about our incomes decreasing because interest rates are decreasing.

The baby boomers with wealth and those with savings are going to get a pay cut as interest income decreases.

Some of these people will be locking in these interest rates for longer terms whilst they are still on offer.

Lower interest rates MIGHT be good news for you share investors too, and some NZ stocks have already increased after the last OCR announcement.

This will be welcome news to battlers like myself who like investing in NZ companies (I know, I know, don’t email me about your US stock pick, I like NZ business, ok!).

I am guessing these jumps are in response to interest rates decreasing.

Lower interest costs = less expenses for a business = more profit = more dividends to shareholders.

Lower interest costs = more disposable income for customers = more profit = more dividends to shareholders.

Markets are often said to be ‘forward-looking’ so they are pricing in all of this stuff changing ahead of it actually changing.

I.e. some NZ stock prices have increased betting on rate cuts but when rates are cut a lot of the movement may have already taken place.

As you can see, interest rates falling will lead to a whole new set of opportunities to learn.

As always, you want to consider your situation and get specific advice rather than taking ole Percy’s predictions from over the fence whose situation is very different to yours.

Many people will get caught in ‘rate FOMO’ too with hindsight telling them they should have ‘waited to fix’ or ‘fixed sooner’ etc etc, you’ll get sick of hearing this ripper chat.

Remember that fixing interest rates is a form of a guess/gamble so don’t beat yourself up if you don’t ’time it perfectly’ because we are always making decisions based off of the information we have when making the decision not with the hindsight the next 6-12 months provides us.

Mikey and I talked more about this in a mid-week podcast. You can find it here:

https://open.spotify.com/episode/4Z8oSP4niANYGnYldkcim5?si=95mR15aqS46xJvpwCqdqZ

Right, I am off to get some sun on my first break of 2024. Be good out there.

Have a good weekend,

Luke

P.s. You are one of?10,725+?recipients.?The KTC podcast had over?75,000?downloads in July.?Feel free to share a lesson with?someone to help this reach more people. ___________________________________________________________________________

Did you know:?the NZX50 index is up over 5% over the last month even as the economy looks really shaky. Planning for rate cuts perhaps!

[$49]?KTC?Night?School:?https://www.keepthechange.co.nz/nightschool-v2

Forward?this link to a friend to sign up and learn?www.keepthechange.co.nz/moneymail Join KTC Skool to collaborate with other KTC members?https://www.skool.com/keepthechange

Speaking enquiries?- please email?[email protected]

I?believe 100,000 kiwi with better financial literacy will create a better New Zealand - and the team at?Generate?KiwiSaver?Scheme?are helping me reach this goal.?Head to?generatekiwisaver.co.nz/change?to find out more.

Helping kiwis get better with money through knowledge & action. Together, we change the wealth of the nation.?