Silver lining to low interest rates

When the Reserve Bank of Australia (RBA) cut official interest rates to 0.10 per cent last week, the going got that little bit harder for retirees and those nearing retirement and aiming to be self-funded. The going was already tough and the outlook seems no better with the RBA hinting that the cash rate may not change in the next three years.

Banks were quick to cut savings rates, but not so quick to review their mortgage rates.

Sally Tindall, research director at RateCity, told The Age that anyone with a mortgage who missed out on a rate cut should snub their lender by “taking their mortgage walking”.

“If the average owner-occupier switched to one of the lowest rates on the market, they could potentially save more than $20,000 in the first five years after refinancing,” she said.

“Variable rates aren’t going to drop by themselves. If you want rate relief, you have to take action yourself.”

She said homeowners with sizeable equity in their property had the most to gain as they were in a stronger position to argue for a discount on their interest rate. But she cautioned that many mortgage holders did not realise how much equity they had built up.

“If you have been paying off your mortgage for some time, you could very well qualify for the cheapest rates,” Ms Tindall said.

Mozo says the average variable mortgage rate sits at 3.34 per cent. “If lenders pass on [the RBA] cut in full, the new average will be 3.19 per cent p.a., which would equate to savings of $33 a month for an owner occupier making principal and interest repayments on a $400,000 loan.”

A savings.com.au analysis of Big Four bank data last week found about half of deposits (including term deposits) were earning below 0.25 per cent per annum in interest.

“Over one fifth (22 per cent) of NAB’s deposits earn less than 0.01 per cent per annum – basically nothing.”

It concluded that savings accounts were now little more than “parking accounts”.

George Lucas, founder and CEO of micro-investing app Raiz, said bank interest rates were so low that savers were struggling to beat inflation.

“To put it simply, inflation may be low, but interest rates are in many cases even lower,” he said.

“This has led commentators to label savings accounts as ‘parking accounts’, where savers may be going backwards as they’re not being compensated for the decrease in purchasing power of their savings, due to inflation.”

According to Raiz, as many as 85 per cent of Australians were unaware of the interest rate on their savings accounts, mainly due to how they were advertised.

The New Daily (TND) super editor Rod Myer said more people should view themselves as investors rather than as interest earners and take a greater interest in growth assets, but stressed the need to seek financial advice.

The switch to ‘investor’ mode is a course of action that carries a caution from RBA governor Philip Lowe. He said the board decision to lower the cash rate would encourage some additional risk-taking, as investors searched for yield. Low deposit rates created difficulties for some people, he said, but helped to support spending and, ultimately, would create jobs.

Have you turned ‘investor’? Have you been forced to take more risks with your funds? Did you first seek financial advice?

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Written by Janelle Ward

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