The Reserve Bank of Australia (RBA) has once again taken the knife to interest rates, cutting the official cash rate down to a historic new low of just 1.5%.
For the one in three households with a mortgage it’s great news. Though watch closely to see how your lender responds to the latest rate cut.
Falls in the official cash rate aren’t always mirrored by home loan rates, but when we‘re talking record low interest rates there is plenty of scope to save on the cost of your mortgage. A growing number of home loans now cost less than 4% so it’s worth checking how your loan compares.
For anyone with money on deposit the August rate cut isn’t so welcome. More so for retirees whose age pension payments may be impacted by a deeming rate that’s out of kilter with market rates.
Single retirees are currently deemed to earn a return of 1.75% on the first $49,200 of their investments ($81,600 for couples) and 3.25% for anything above this amount.
Earning a return above the deeming rate won’t affect your pension entitlements. However today’s low rates mean achieving this can call for a fresh way of thinking.
The first step is knowing what your money is currently earning. Returns on 12-month term deposits range from 1.75% to about 3.00%, and if you could earn a better return with a different financial institution, ask your bank to match it. Plenty of retirees are long term bank customers, and this is when you discover if that loyalty pays off. If your bank won’t step up to the plate, be prepared to take your money elsewhere.
An alternative is to spread more of your money across online savings accounts. At the top end of the scale some are paying rates of 3.35% though conditions often apply.
It is possible to earn more on your money by looking beyond cash-based investments. But for all of us, chasing higher returns without looking at risk is a huge trap. I am so saddened when I see retirees in particular, losing their money. It is terrible at any age, but those still working can recover. The list of retiree investment disasters is very long – Pyramid Building Society, Estate Mortgage, FinCorp, Westpoint, Banksia and so on. Billions of dollars lost. The trap in all of these was a promise of higher returns with no more risk.
Sure, you can add higher return investments to your portfolio, and most of us should. Leaving everything in “safe” cash investments at 3% or less with our banking system is certainly not risky, but this rate of return may well mean a very restricted lifestyle. Higher returns in assets such as property and shares is historically quite realistic, but clearly there is more risk.