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What the RBA overhaul means for interest rates

The Reserve Bank of Australia (RBA) is facing a major overhaul following an independent review.

What does it mean for interest rates and for Australian mortgage holders? We dive into all your questions in this article.

Why was there a review?

Treasurer Jim Chalmers announced the review in July 2022 – the first review of the RBA since the central bank started to target inflation in the early 1990s.

“The Review is all about ensuring Australia’s central bank and monetary policy arrangements are as strong and effective as they can be into the future,” Treasurer Jim Chalmers said.

The final report, ‘An RBA fit for the Future’, was released on April 20, 2023. It looked at the RBA’s performance over the past three decades.

What were the key recommendations?

The review made a lot of recommendations – 51 to be precise. The gist was for decisions about the cash rate to be made with broad input, and the reasons for any changes to be much clearer to the public.

Some of the key recommendations included:

  • The RBA should have a ‘monetary policy board’ with greater economic expertise and shift to eight meetings a year (instead of 11) to allow more time to consider issues.
  • There should be a press conference after each meeting to encourage more transparency, and board members should speak publicly about the board’s work.
  • Two separate boards should be established – one for monetary policy, the other for governance of the RBA.
  • The inflation target of two to three per cent should be retained.
  • There should be five-yearly reviews of the RBA’s monetary policy framework and policy tools.

So, what’s next?

The government is expected to legislate changes relating to the review from next year. Mr Chalmers has indicated he is hopeful the changes to the RBA could take effect by July 2024.

Meanwhile, RBA Governor Philip Lowe welcomed the recommendations. “The board will consider these issues over coming meetings and develop and implement a new set of arrangements,” he said.

What about the impact on interest rates?

As mentioned, the RBA currently meets 11 times a year on the first Tuesday of the month (except in January) and the board makes a decision about the cash rate. After the decision, lenders decide whether to adjust their interest rates.

If the recommendations of the review go ahead, the monetary policy board will meet 8 times a year. There will be more time between meetings for the board to weigh up the latest economic indicators before making a decision.

In other words, homeowners won’t get back-to-back rate hikes (or pauses or cuts) every month.

And with fewer cash rate changes, there will be more time for households to adsorb and adapt to any cash rate hikes.

On the flip side, with fewer meetings, it may also be necessary to make larger changes to the cash rate (which has been the case with the US Federal Reserve and the Reserve Bank of New Zealand).

Like to know more?

We’d be happy to answer any other questions you might have about the RBA overhaul and what it means for you. Please get in touch and let’s chat.

How your HECS-HELP debt affects your borrowing capacity

Do you know how much you owe on your HECS-HELP debt?

While student HECS and HELP loans in Australia are interest-free, they are indexed every financial year based on a cost of living index.

The recent outbreak of high inflation means millions of Australians with student loan debts are facing a 7.1% increase from 1 June, up from 3.9 per cent the previous year.

Your HECS-HELP debt is an important piece of information that banks take into consideration when assessing your application for a home loan, so it’s important to understand yours.

If you’re a bit vague about all the details, it’s worth reading on to see how indexation will impact you.

What is HECS-HELP?

The Higher Education Loan Program (HELP) is a federal government scheme that offers loans to students so they can afford their university and higher education courses.

Most university courses fall under the banner of a Commonwealth Supported Place (CPS). With these, the federal government covers some of the student’s university fees, while the student covers the rest – known as the ‘student contribution amount’.

Your HECS-HELP loan can be used to pay the ‘student contribution amount’. It can’t be used for things like accommodation, textbooks or your dormitory’s mini bar supply.

How do you find out how much your HECS-HELP debt is?

You can check the balance of your HELP debt, the indexation amounts and your voluntary and compulsory payments through myGov or by contacting the Australian Taxation Office (ATO) directly.

Do you pay interest on a HECS-HELP debt?

HECS-HELP debts are interest-free, but the amount of the debt is adjusted on 1 June each year in accordance with an annually determined inflation factor.

And because the cost of living and inflation has gone through the roof, the latest annual indexation factor is higher.

The 2022-23 HECS-HELP debt indexation factor for 2022-23 is 7.1%. To put it in perspective, in 2022, it was 3.9%. In 2021, it was 0.6%. Big difference, right?

Another way of looking at it is like this:

  • a $10,000 loan balance would increase by $710
  • a $25,000 loan balance would increase by $1,775
  • a $50,000 loan balance would increase by $3,550.

What does this have to do with getting a home loan?

When you apply for a home loan, lenders will look at your HECS-HELP debt when assessing your loan application.

While this type of debt is different from credit card debts and personal loans, you still need to make repayments on your student loan and this ultimately affects your income and borrowing capacity.

Paying off your HECS-HELP debt

Once you earn over a certain threshold, your employer will deduct a percentage of your income to go towards your HECS-HELP debt. The more you earn, the higher the repayment rate.

You can find more about the HELP repayment rates and thresholds here.

These PAYGW (pay as you go withholding) amounts are only applied after you do your tax return. So, if you were to jump online and look at your HECS-HELP debt today, your PAYGW payments wouldn’t have been applied yet.

What about voluntary payments?

You can make voluntary payments towards your HECS-HELP debt through myGov. Once processed, voluntary payments are credited directly against the loan balance by the ATO.

If you wanted to pay your loan balance off in full before indexation is applied on 1 June, you’d need to do so as soon as possible (taking into consideration bank processing times).

It is recommended to talk to your accountant or financial advisor about whether making voluntary payments is right for you.

Bottom line

Whether or not you are considering buying a property, it’s important to understand your HECS-HELP debt and how this year’s higher indexation could affect you.

If you’d like to find out more about how your HECS-HELP debt might be treated by lenders, get in touch and we’ll explain.

Additional Resource
https://www.realestate.com.au/home-loans/guides/can-you-still-get-a-home-loan-with-hecs-help-debt

Understand What You Can Borrow

When you’re applying for a loan, it may be tempting just to speak to the financial institution you already bank with. The mortgage market remains highly competitive and it pays to seek alternatives.

Better still, consider using the services of a mortgage broker. A good mortgage broker has access to a panel of lenders and knows their lending application processes.

This will save you time and money and give you the best chance of getting the best possible loan when you need it. They will also be able to advise you on which loan is right for you, given your own personal circumstances.

Carl Thompson – Commercial Lending Specialist, Strategic Investor Group

Big Banks Royal Commission Jitters

Australia’s big four banks continue to manage multiple challenges including falling house prices, a regulatory backlash sparked by the royal commission, and higher funding costs.

A further challenge is that international funding costs have been creeping up in recent months – a trend likely to cost banks hundreds of millions if they are not passed on to customers.

Issues raised by the royal commission will make it much harder for major banks to raise their interest rates independently of the Reserve Bank. At some stage, however, an economic decision will need to be made.

How are you placed should interest rates rise sooner rather than later?

Carl Thompson – Commercial Lending Specialist, Strategic Investor Group

Getting started in property investment

Some people get overwhelmed when considering a property investment and quit before they even begin. Reality is, property investing is relatively straightforward, especially when you partner with the right professional.

What does success look like to you? Property investors generally invest in property to secure their financial future or to be free to do what they want, when they want it.

Understanding the property market is the key to making the right investment decision.

Strategic Investor Group exists to create your unfair property advantage with advice regarding location, investment strategy, debt structuring and property acquisition.

Carl Thompson – Commercial Lending Specialist, Strategic Investor Group

Investor Mortgage interest rate payments rise despite no hike from the RBA

Australia’s banking and finance system delivers higher profits to only a few and rips off its most loyal customers, a Productivity Commission report has found.

The commission found loyal customers were “ripe for exploitation”, with one in two people still banking with their first bank. Only one in three have considered switching banks in the past two years, accepting interest rates on home loans up to 0.4 per cent higher than new customers.

Banks responded to orders from the Australian Prudential Regulation Authority to curb interest-only mortgages by raising interest rates – not just for new loans – but for all existing investor loans.

Now’s the time to seek professional advice and review your property investment strategy and mortgage interest rate.

Carl Thompson – Commercial Lending Specialist, Strategic Investor Group

First home buyers on the rise

First home buyers increased their share of housing demand this quarter, hitting the highest level since 2011.

Overall, first home buyers accounted for almost two in five sales in new housing markets and around one in three in established markets.

Most of the first-time buyers were owner-occupiers rather than investors.

It is a trend expected to continue over the year ahead, with first home buyers, owner-occupiers and local investors tipped to increase their share as foreign demand continues to fall.

Now is a great time to obtain market-leading advice on your property investment strategy.

 

Carl Thompson – Commercial Lending Specialist, Strategic Investor Group

Area X-Ray – Was your last property purchase average?

Strategic Investor Group’s Area X-Ray classifies over 180 suburbs within a target 20km radius of Sydney’s CBD based on 16 key growth criteria. Suburbs are rated A, B or C based on this assessment.

Over the past 12 months, all categories within Area X-Ray have outperformed the broader Sydney market.

 

Carl Thompson – Commercial Lending Specialist, Strategic Investor Group

Global Monetary Tightening

Australian banks’ “continued reliance” on wholesale funding from overseas institutions may see pressure on local interest rates.

One reason is “global monetary tightening”, especially given the European Central Bank (ECB) is starting to wind back the massive monetary stimulus which it pumped into the European economy since the global financial crisis.

In addition, Fitch expects the US Federal Reserve to lift interest rates four times this year.

America’s official rate is currently sitting in the 1.25-1.5 per cent range, so even one rate hike would mean US rates would be more competitive than Australia’s (currently at 1.5pc).

Stable customer deposits are the Banks preferred funding source.

Should the Banks be unable to raise sufficient deposits they will need to access the more expensive option of global wholesale funds.

Carl Thompson – Commercial Lending Specialist, Strategic Investor Group

Cash Rate Unchanged

As expected the Reserve Bank has maintained official cash rates at the lowest levels ever recorded…

The official cash rate has now remained at 1.50% for twelve months and every indication is that prevailing market conditions will ensure the rate remains at these levels for some time to come.

Whilst the Reserve Bank continues to monitor other key economic indicators such as the Australian Dollar and underlying Inflation, it is hard to see the Reserve using interest rates as a leverage against these factors in the short term.

Many people continue to sit around waiting for things to change, in particular regarding a property purchase. However, the longer you wait, the more likely you are of missing out on today’s opportunities.

It is important to remain informed. At Strategic Investor Group, we are well placed to provide you with sound advice regarding property strategy, debt structuring and property acquisition.

Carl Thompson – Commercial Lending Specialist, Strategic Investor Group