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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

How prepared are you for your property purchase?

Eighteen per cent of Australian bidders have failed to get pre-approved finance prior to attending an auction, a new study has revealed.

According to a recent YouGov Galaxy poll, nearly one in five adults in Australia failed to secure finance before buying at auction.

Given it takes time to seek and be granted pre-approval it is important to seek professional advice as early as possible.

Buyers need to determine how much they can borrow and gain certainty that they are being realistic with their expectations.

Pre-approval is an indication from a lender that they feel comfortable lending a set amount of money to a potential buyer. It puts the buyer ahead of the game and strengthens their position when negotiating a purchase.

Carl Thompson – Commercial Lending Specialist, Strategic Investor Group

Is your loan structured correctly?

The Reserve Bank has left the official cash interest rate on hold at 1.5 per cent for the 20th month in a row.

It is “universally anticipated” that the RBA won’t move on rates in the immediate future.

Most economists only expect one rate rise this year and 10 out of 24 analysts expect rates to remain on hold into 2019, and potentially beyond.

It is important to remain fully informed, and understand your options, by reviewing your individual circumstances today.

Carl Thompson – Commercial Lending Specialist, Strategic Investor Group

Location, Location, Location

Sydney has the nation’s most evenly distributed new apartment market – putting it at less risk of inner-city oversupply – according to the 2018 UDIA State of the Land Report.

Just over a fifth of new Sydney unit completions (apartments, townhouses and terraces) were within five kilometres of the city centre in 2017 compared with almost half of all Melbourne unit completions – the country’s fastest-growing apartment market – the report found.

A third of new Sydney units were within 5 to 10 kilometres of the CBD, 28 per cent of completions were 10 to 20 kilometres out and 18 per cent of completions were as far as 50 kilometres from the centre of town.

Obtaining industry best advice is essential prior to making any potential property investment decision.

Carl Thompson – Commercial Lending Specialist, Strategic Investor Group

Sydney’s next wave of change: $87bn of Infrastructure Projects

Sydney will be a 30-minute city by 2056. The NSW government recently announced a 3-city plan.

The next 10 years will see a significant shift in the City. Sydney’s new Greater Sydney Commission is preparing Sydney for the next wave of change – the creation of three separate cities; the Eastern City – with Sydney CBD as its focus, the Central City with Parramatta as its focus, and the Western City with the Western Sydney Airport as its focus.

These cities will be fully functioning cities connected by major infrastructure projects by 2056.

Understanding of each of these infrastructure projects in Sydney and the key drivers for business and commerce in each of the three cities is key to understanding the future property investment options across the region.

Ensure you speak to a professional today regarding any potential property investment decision.

Carl Thompson – Commercial Lending Specialist, Strategic Investor Group

Property Investment – Timing is everything

The market waits for no one. It will go up or down with or without you as an investor.

An experienced independent advisor will ensure you won’t buy the wrong asset, wait too long or pay too much.

Whilst it may seem like you’re paying more upfront, having professional advice in the early stages, will ensure that you come out financially on top in the long run.

Remember, the price is what you pay but the value is what you get.

Property is a forgiving asset and you can mitigate the perceived risk largely by ensuring you buy the right property and take a long-term view.

Carl Thompson – Commercial Lending Specialist, Strategic Investor Group

Housing investor loan cap ‘reaching end of useful life’: APRA

The banking regulator has signalled it could ditch its 10 per cent cap on lending to property investors as the measure is “probably reaching the end of its useful life”.

Smaller lenders have criticised the 10 per cent cap for holding back competition.

The marketplace would welcome APRA addressing the cap’s current settings in order to improve competition, which will ultimately benefit the consumer.

Under pressure from regulators, banks have also in recent years overhauled their systems for assessing customers’ incomes, their debts, their cost of living, and their sensitivity to higher interest rates.

Now is the perfect time to seek professional advice if you are considering property investment.

Carl Thompson – Commercial Lending Specialist, Strategic Investor Group

Competition heats up among lenders for first home buyers and investors

Softer conditions in home lending are prompting the country’s banks, whose loan portfolios are dominated by residential mortgages, to target growth opportunities in specific customer segments, including property investors and first home buyers.

Under the Australian Prudential Regulation Authority’s rules to dampen the housing market, no more than 30 per cent of new bank home loans can be interest-only, and banks’ housing investor loan books can grow no faster than 10 per cent.

The big four banks are now all well below these caps after various moves to increase interest rates and tighten credit.

Now is a great time to invest in property and source a great financing package in a highly competitive marketplace.

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