The RBA surprised many with its decision to cut rates by 25 basis points to a record low of 2.25 per cent. After previously holding fire for 18 months, this latest cut was welcomed by some (mortgage holders), but not so by others.
Homeowners are expected to save $45-$50 a month on the average $300,000 mortgage. The treasurer, Joe Hockey, was on record stating that the rate cut along with the drop in fuel prices meant the equivalent of a 0.75 per cent interest rate reduction. Also, for those shopping around for home loans, an interest rate south of 5 per cent p.a. is now becoming quite the norm. For many of you who can recall the early 1990s and interest rates in the double digits, all this must make you question why on earth further cuts are even necessary! But that’s a story for another day.
While the cut was a positive for some, it becomes more and more difficult to generate a decent income outside of investment in riskier assets such as shares and property. This can make it difficult for retirees who often have a larger portion of their nest-egg parked in cash and fixed interest type investments. The term deposit rates now being offered are barely above 3 per cent. The RBA cuts are one thing, but the fact that the banks don’t need your money as much as they did a few years ago doesn’t help the cause.
You see, in order to provide home loans to people, banks generally have the options of using depositors’ money, borrowing from overseas, or under normal circumstances, using a mixture of the two. Back in 2009 at the height of the GFC, there was a rush by our banks to bolster their deposit bases. At the time, funds became much harder (and more expensive) to obtain from overseas sources, so the banks wanted the help of savers to reduce the need for overseas funding. To encourage you to part with your ‘hard-earned’, the banks offered some juicy term deposit rates. Fast-forward to 2015, and it’s fair to say things have settled down considerably since those days. The banks have strong deposit bases with little trouble in borrowing funds from overseas. This means that there is less competition for depositors’ money today.
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So, where to now for interest rates? With talk of the possibility of further rate cuts, the pain is likely to continue if you rely on income from interest to provide for your retirement. While the options for savers to generate a secure and reasonable return on their money are dwindling, I would caution people jumping full steam ahead into the riskier investments such as shares and property, without doing your homework. Remember, things can change very quickly. Few of the so-called experts predicted the price of oil to fall 50 per cent in 6 months!
My advice is to work out what level of risk you are comfortable with and allocate your funds accordingly. Your investments should always pass the ‘sleep-at-night’ test.
Are you feeling the pinch with lower interest rates on your savings? Please share your thoughts below.
Information provided in this article is general in nature and does not constitute personal financial advice. Before making any decision based on this information, you should assess your own circumstances or seek advice from a financial adviser. Wally David is an Authorised Representative (318432) of Wealth Managers Pty Ltd, AFSL No. 232701.
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We hope to see you celebrating the over 60 life with other over 60s on February 17 2015.