We Live in A Confused Interest Rate Market

Hi Nancy,

As you know, both mid-year and in the run into Xmas,?we contact our client base both new and old and for several reasons even those whom we may not be looking after at this time.

It is my hope that this email (it is a little long), will resonate with you at this time.

While I can not display the interest rate table in this article if you wish to see the table please let me know

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In this current economic environment, we find ourselves in since covid, Australians have been doing it tough.

I have heard Dr Jim Chalmers say this on many occasions as do many other Politicians and Govt. Technocrats.

The simple truth is some are, and some are not doing it tough, later I will state why.

While the Govt. is attempting to support the Economy and its Citizens, the RBA is seeking to reinstate low inflation while maintaining stable employment.

It is known that Australians have been suffering a per-capita recession for at least 20 months, and I might add with no real light yet appearing on the horizon.

News feeds all have various opinions on what is occurring or what may be expected to occur, noting the GDP for the March quarter was just announced at 0.1%, which means our economy grew by 0.1%.

My take on this having some history since buying our first home back in 1985, living through the 1989 stock market slump, the subsequent recession of 1991, and then all the other moments in time until today, is that Central Banks leave rates too low to too long and then raise them too high to too long.

Who suffers?

Well, that depends on the type of slowdown the economy is having as recessions or low GDP growth generally affects only parts of an Economy while other parts do okay, they call this a Two Speed Economy.

Nice to have a name for that, don't you think? At least it's not a depression where all aspects of the economy tank.?

To make a point, how we can ease the burden for some but not all, as everyone is in a different financial stage in their lives.

We have attached a file that demonstrates the topic I have used for today's conversation with you, "We Live in a Confused Interest Rate Environment!!"

Attached is a simple two-page overview for a redraw loan, not an offset loan as that type of loan generally comes with an annual or monthly fee, including the notion that you can save interest by having an offset account.

While it is true an Offset account can save you money, time and time again when I do the numbers on annual offset savings, I find that many of us, but not all can't take advantage of offset savings due to not having a large sum offsetting our loan. Now that does not mean that Offset accounts are not useful when set up for the right reason, I simply wanted to sue the lowest rates on off to show my point of view.

For example, if the annual fee for the offset is $395PA, and the rate is say 5%, then you need approx. $7,900 in offset funds continually to save $395pa, if the fee is $10pcm or $120PA, then you need to have constantly in your account a minimum of? approx. $2,400PA.?

Banks, generally charge a premium for that type of loan, generally 0.10% as a minimum, so on a $500K loan that is an extra interest charge of approx. $500PA plus the annual fee or monthly fee.

One can end up having to pay an extra $620PA to $895PA in fees and interest for an offset-style home loan.

Now if we apply an interest rate of 5%, we find we require $12,400 in Offset to save $620PA & $17,900 needed in Offset to save $895PA.?

Hence why my example is a redraw-style loan option that has no annual fee, no ongoing monthly fees and has free redraw back to your transaction account for those times when you need to take some savings out of your home loan for a purpose.

We want to show in this example the lowest rate option with the maximum savings for you.?

How do banks justify COF (Cost of Funds), this is where Banks cite, ROI (Return on Investment) or ROC (Return on Capital).

It is their way to substantiate their interest rate or why they cannot or won't provide you with a better rate than what you have, you see all banks operate at various margins to capital, and this is why interest rates vary. We do live in a free-market economy where businesses are free to set their own level of profitability, and we as consumers can freely choose who to do business with.

So why do we see repeatedly that your rate is higher than what the bank is offering new-to-bank customers, it is called marketing.?

Check out the attached file rates for ten (10) banks, then check your home loan rate.

Why is it that one bank can offer, for an owner-occupier loan under a 60% debt ratio and on P&I repayments, 5.99% while at the other end of the spectrum, we have 6.59% on offer, the answer is complex, and Lenders fall back is their required ROI or ROC.

The question is, do we care?

Money is a commoditised product; therefore, interest rate spreads should be much narrower between Lenders.

So as not to isolate those banks with higher rate offers; on a good day, in many cases by calling them for you we can get the bank to match a competitor's rate, unfortunately, we don't achieve this 100% of the time.?

If we look at the rate spread of 0.6% difference that now exists between high and low on a $500,000 home loan, this is costing you up to $3,000PA or $250pw more in interest, that sum is paid post-tax, not paid pre-tax.

To pay $250 more each week if you are on say a 30% tax rate, you have to earn about $358 gross, times that figure by 12 we get $4,296, and thus, you can see how this affects many households, especially when the average home loan is currently $607,963 on an owner occupier property. These calculations are only an estimate, I am not a tax agent and therefore can't confirm the accuracy or seek to provide advice on tax, but I am sure you can see the numbers as I can.

We can see how a "Confused Interest Rate Environment", impacts your cost of living, by having at this time in the cycle the wrong loan type with possibly the wrong bank that has you on a less than competitive interest rate.?

In closing, I can't say that everyone can get a win from this commentary of mine as some will not be able to refinance and their current bank may not be prepared to match or drop their interest rate for you, however, it is worth asking, is it not?

If when you review the attached file, and you find your rate is not competitive this then provides you with a reason to call them and quote the rates on offer in the attached sheet, if you have a win, please email to advise and so we can make a note on your loan file. If the bank does not match or drop the rate email me and we will first try and get the bank to adjust your rate, or in some cases, we will see if we can move you to another more competitive offer.

Please keep in mind for many of us the surge in interest rates at this time means that what we could borrow previously, we can now no longer borrow. For that reason, some banks offer a special 1% assessment rate deal on top of their rate offer. This offer was designed to assist those who wanted to seek a better rate elsewhere but could not refinance on today's assessment rates which is 3% above the rate quoted. But, keep in mind those banks that offer this generally are at the higher end of the rate sheet we have provided.

Thank you for taking the time to read my email, we are always here to lend a hand or provide advice as and when the need arises