May 2012 Newsletter

Welcome to our May newsletter

The Reserve Bank of Australia (RBA) this month cut the official cash rate by 0.5 per cent, the biggest cut seen since the GFC-fuelled one per cent rate reduction in February 2009.

The move, designed to ease monetary policy, brings the official cash rate down to 3.75 per cent, its lowest level since December 2009.

The RBA said the decision was largely due to weaker than expected inflation data as well as ongoing weakness in both the international and domestic economies.

While economic “shocks” appear less prevalent, conditions remain decisively sluggish across the board, with the economy in serious need of a “boost”, RP Data economist Cameron Kusher said, welcoming the rate cut.

“We have seen a lot of softness in the economy of late,” Mr Kusher said. “House prices are down on where they were, retail activity has slumped and headline inflation was just 1.6 per cent for the year.”

Other property and finance commentators were also quick to welcome the RBA Board’s decision.

“Today’s decision is a decisive move which will help confidence and activity in residential construction and the wider domestic economy,” the Housing Industry Association (HIA) said, while Master Builders’ CEO, Wilhelm Harnisch, said the move had “the potential to act as [the] important psychological circuit breaker required to boost confidence and rekindle home buyer interest”.

AMP chief economist Shane Oliver said the move indicated the RBA is finally on the right path. Mr Oliver also predicted two more rate reductions before year’s end.

“At last the RBA has moved to get back on track and reverse the defective monetary tightening we have seen so far this year, thanks to higher bank lending rates, and
to address the fact that the non-mining economy in Australia is really struggling,”
he said.

“I would look for another two 25 basis points cuts, with one around June/July and another around August or September. This will take the cash rate down to 3.25 per cent by year end and average standard variable mortgage rates down to around 6.6 per cent.”

Of course, with some lenders now moving out of sync with the central bank, the size and effect of any reductions passed on to borrowers remains to be seen.

However, for a $282,800 home loan (the average owner-occupied loan in February 2012, according to the ABS) with an initial interest rate of 7.25 per cent, a 50 basis point cut – if passed on in full – could reduce repayment commitments by around $90 per month.

Of course being able to reduce your loan repayments might sound great, but doing so may not be the best decision for your mortgage reduction strategy. This month, we look at how dramatically a little extra payment on top of your basic loan commitment can impact the overall cost of your mortgage.

Read on to find out more.

If the Reserve Bank’s bold rate reduction has caused you to stop and think about your home loan, or if you’d like any help determining or calculating your mortgage repayments, please don’t hesitate to get in touch. Just what is the best mortgage strategy for you can change for various reasons, so if you haven’t reviewed your finances for a while it just might be worth having a chat.

Sincerely, Nick Foale


Reducing your mortgage safely and simply

The Reserve Bank’s recent rate reduction was welcome relief for many home owners and investors, but what to do with that extra cash…

The Reserve Bank’s reduction of the official cash rate earlier this month will mean a nice little reduction in the minimum home loan repayments of some home owners and investors.

But you could see much greater savings by making some simple changes to the way in which you make your repayments.

While it might be tempting to put the extra cash from your rate reduction towards a new wardrobe or car, have you considered keeping your loan repayments at their current level?

It’s not hard to see why you benefit. Basically, the longer you take to pay off the principal amount of your loan, the more interest you will end up paying.

By increasing the amount of your monthly home loan repayment – or not reducing it when the Reserve Bank cuts interest rates – you could shave thousands of dollars off the total amount you end up paying.

You would also cut dramatically the time you need to repay the loan.

This is the safest and most commonly used mortgage reduction strategy in Australia – and it’s an extremely effective one. You only need to crunch a few numbers to see why.

For example, if you have taken out a $300,000 home loan, at a variable rate of 7.25 per cent over a 25-year term, your minimum monthly repayment sits at $2,168.42.

If your lender passes on a 0.25 per cent rate cut, this will bring your variable rate down to 7.00 per cent, with a new minimum monthly repayment of $2,120.34.

This represents a saving of $45.08 per month and while that might not have a huge impact on your financial situation, it could mean the world of a difference to your mortgage.

That additional $45 per month could potentially save you more than $21,370 in interest repayments and wipe 1.4 years off the life of your loan if you choose to include it in your current repayments rather than spending it.

It really is that simple.

And with a new found taste for saving, have you considered switching your loan repayments from a monthly to a fortnightly schedule?

This is another simple but effective mortgage reduction strategy that carries with it little to no risk at all.

By dividing your monthly mortgage obligation in two and paying this amount every fortnight you will end up making one additional payment every year, which can wipe significant time off the life of your loan and save you tens of thousands of dollars that otherwise would be spent on interest.

Unlike other mortgage reduction strategies that include the burden of having to actively manage your mortgage on a monthly – or even daily – basis, fortnightly payments can be set up as a direct debit so you can simply ‘set and forget’.

Best of all, once the additional payments have been factored into your budget, you will hardly notice any difference.


Planning your tax return

Maximise the value of this year’s tax refund by preparing well in advance 

With the end of the financial year almost upon us, it’s time to knuckle down and begin planning your tax return.

All too often, people leave doing their return until the very last minute. Not only can this result in omissions, errors and other problems, it can also mean you miss out on part of your refund.

With a little organisation and effort, however, you’ll be in a far better position to minimise your tax liability and maximise your deductions – meaning more money in your pocket.

Here a few simple strategies to keep you on the right track at tax time:

Know what you can claim
Knowing what you can and can’t claim is the first step to maximising your tax refund, as well as to minimising any problems due to an inappropriate claim.

This is particularly important when you have an investment property – while there are plenty of tax benefits you need to know what they are and how to use them to your advantage.

Deductible expenses also vary between occupations so it’s not surprising that thousands of Australians find themselves in hot water each year.

The Australian Taxation Office (ATO) has full details of allowable deductions online, broken down by individual occupation.

The user-friendly guide is free to download and should be the first stop for all who are unsure about what they can and can’t claim.

Keep track of all expenses
As a rule of thumb, you should save receipts for every work or education-related expense you incur during the year. You’ll be surprised at what you can claim, and will only cut yourself short by throwing away receipts.

You should also keep all important financial statements, including those for bank accounts, credit cards and home loans.

This will also help highlight other areas where expenses can be claimed – especially if you have an investment property.

Bring in the experts
To ensure you claim every deduction available, using a professional tax accountant would be a good investment – especially if you have any sort of investments, property or otherwise.

While a professional tax accountant will charge a fee, you can rest assured that every deductible expense has been included.

Moreover, the chances of being called up before the tax man will be dramatically decreased.

This is also a good opportunity to begin planning your tax return for the following year. Speak to your accountant about any tax incentives you should be aware of and expenses you should take note of over the next 12 months.

Your final question should be, ‘What will I do with my tax refund?’

It would be wise to use a majority of the refund to put towards paying off your home loan or any other outstanding debts you might have.

Consider your return as an annual savings payment that can be used to offset any rising debt and drive your mortgage down more quickly, saving you thousands of dollars over the longer term.


Keeping warm on a budget

This winter, beat the cold without sending your electricity bills through the roof

The winter months are not too far off and in many regions the cold weather will soon be settling in. Many Australians then opt to stay indoors in a bid to beat the big chill.

Unfortunately, winter time also has its financial costs, with electricity bills reflecting the growing cost of heating a home.

With the help of a few energy-efficient strategies, however, you’ll not only keep your home warm but also not fear the winter bill quite so much.

Shut up! Shutting up the house is the easiest way to trap heat inside. Make sure your doors are closed except when you are coming or going out.

Close curtains and blinds: Your windows, even when closed, will transmit cold air into the house. To prevent this from happening, keep your curtains and blinds closed if possible. You’ll have extra privacy as well as a warmer environment.

Insulate your roof: Without proper roof insulation, much of your effort to keep your property warm will be wasted. Remember, heat rises so you need to keep it in.

Be energy efficient: Ensuring your electrical appliances and light globes (used more frequently in winter) are as efficient as possible will save you money year-round, not just in winter. Check appliances for their efficiency ratings.

Save with double-glazing: Investing in high quality double-glazed glass isn’t cheap – but considering how much you’ll save on your electricity bill, it could be a worthwhile long-term investment.

Hot water bottles: Forget the electric blanket – you can pick up a good old-fashioned hot water bottle for next to nothing. There’s a huge range of colours, shapes and sizes available so you’re bound to find one you like.

Cover the floor: Tiles and timber floors look great but can be cold on the feet in winter. Consider investing in a few rugs for greater comfort.

Rug up: It’s time to dust off the quilts and pull them out from the back of the linen closet. Doonas or throw rugs can also be picked up from as little as $20.

Home cooking: Winter is the best time to perfect your culinary skills and plate up that hearty, comfort food. Cooking on the stove top won’t just fill the house with delicious aromas, it will also warm your kitchen.