It’s been over a decade since we’ve seen interest rate rises. For many people, this is a new experience that will undoubtedly affect their financial planning. Mortgage holders who have previously watched rates drop to an historical low will have to find an additional $797 per month[1] on an average $610K loan[2].
While on the other hand, retirees and those with cash in the bank, would be forgiven for fist pumping the air and shouting, “It’s about time!” In this article, we overview key financial planning considerations when dealing with rising interest rates and a volatile share market.
Loan Offset Account
Generally, to keep on top of increased loan repayments you will have two options: spend less (for example, re-prioritise existing spending) or save less.
A quick review of your spending will very likely identify discretionary spending that can be reined in without a significant imposte on your lifestyle.
However, on the matter of savings, an offset account attached to your home loan can assist you to more efficiently manage your savings.
An offset account allows you to manage and save surplus cash and concurrently pay down your loan in a manner that directly reduces the amount you’ll spend on loan interest. That is, your surplus cash will be ‘offset’ against the loan amount, reducing the loan’s balance which means the interest payable will be less. You can read more about other offset account benefits here.
Personal Cashflow
The cost of living is increasing too. Petrol prices, fruit and vegies, insurance premiums are all going up for a range of reasons that include supply issues caused by global as well as local factors.
Typically, inflation occurs when the economy has low unemployment, which creates high levels of demand and spending. Increasing interest rates is a strategy used by the RBA for curbing demand. Higher interest rates have the effect of reducing overall demand for goods and services. For mortgage holders, they are forced to direct more money to service their loans and therefore away from other spending.
Understanding your personal cashflow situation is the key to successfully managing your debt and financial matters, especially in the current unpredictable economic conditions. We can help you to create a personal budget, understand your cashflow and implement a spending plan that works for you.
Alternatively, if you have a cashflow plan and just need help staying on track, applications such as the myprosperity app may assist you in this regard. You can learn more about it here.
Term Deposits
While lenders are often quick to apply an interest rate increase to your loan account, they can be considerably slower when it comes to increasing rates on savings accounts. While, some Term Deposit accounts have increased their saving interest rates, take a moment to get advice before you lock-up your money for a year or more.
There’s plenty of economic commentary indicating there are more interest rate rises to come, so waiting a little longer may mean a better return in the long run. Even so, at just a couple of percent, it’s still only meager earnings on offer. There may be alternative options worth considering that are better suited to your circumstances and goals.
Investing
The share market is subject to volatility at any time, but the last couple of years has certainly displayed rollercoaster style ups and downs.
When it comes to investment strategy, our fundamental principles include investing for the long term, diversifying to spread risk, using a dollar costing averaging approach when buying and selling.
Then, on those occasions when things look bleak, it’s important to talk to us and get advice that’s right for you, because selling when prices are down could lock-in the loss.
While we don’t doubt you’ll feel anxious though the highs and the lows, history indicates markets, even following major corrections, recover (often quickly) and generally continue to rise over the long term.
Next steps
If you’re feeling anxious about your financial circumstances, please don’t suffer in silence, give us a call to talk through the financial planning strategies you have in place.
It’s also important to let us know if there have been any changes in your circumstances that could impact on the strategies you have in place.
We are a multi-award winning financial planning firm with an experienced, tertiary qualified team of authorised financial advisers, who are all committed to guiding your financial plan. You should also know that research indicates an ‘advised’ financial plan has a 5.2% better outcome than an ‘unadvised’ or DIY approach [3].
If you are concerned about family members who may be affected by rising interest rates and who could benefit from financial planning strategies, please share this article and our contact details.
We’d be pleased to start a conversation that can help them achieve what really matters.
To find out more, please contact Brett Cribb, Steve Nicholas or James Marshall on +61 (0)7 3007 2007, alternatively please email info@stratusfinancialgroup.com.au, and let’s make it happen.
Stratus Financial Group helps professionals, executives, business owners, families and retirees manage their complex financial affairs and coordinate their professional advisers.
Stratus Financial Group and its advisers are Authorised Representatives of Fortnum Private Wealth Ltd ABN 54 139 889 535 AFSL 357306. This is general advice only and does not take into account your objectives, financial situation or needs, so you should consider whether the advice is relevant to your personal circumstances. You should also read the relevant Product Disclosure Statements (PDS) before making any financial decisions.
[1] Calculated using: https://www.abc.net.au/news/2022-08-02/mortgage-rate-rise-calculator-interest-rates-loan-rba-repayment/101290680 Using P&I repayments based on starting interest rate of 3.00% and changing to an interest rate of 5.25% which reflects to cumulative increase in interest rates of 2.25% since early May 2022.
[2] Average loan: https://www.abs.gov.au/statistics/economy/finance/lending-indicators/jul-2022
[3] 2021 Value of an Adviser Report – Russell Investments
https://russellinvestments.com/au/financial-advisers/your-business/business-solutions/value-of-an-adviser
