(03) 9020 2905Damnit. I hate to play Grinch. But someone has to. You need a cold dose of reality injected into your veins. And that requires a qualified professional.
Lucky I am such a person. Dr Debt Man.
Given I’ve delivered my share of good news to West readers on interest rates this year (see below), I feel it’s my duty to also deliver some bad medicine. I’ll pull out the syringe to give you what’s coming to you.
You need this shot because the experts’ previous diagnosis was wrong. Your future is looking bleaker than first thought. It’s not terminal. But they clearly weren’t panicky enough. What’s coming could be painful.
The experts treating you are seriously worried. They are feasting on their fingernails.
We’ve now had two cuts from the Reserve Bank in successive months. A good sign in the lead-up to Christmas? Nuh-huh. (But I’ve got solutions coming.)
And the good news/bad news is that there’s probably more rate cuts to come. Many believe the RBA will slash rates again early next year.
The natural reaction from homebuyers last week was to cheer. Depending on how much your bank passed on. You might have cracked a beer, thinking Christmas is going to be a little bit sweeter.
But will it?
Only a tiny percentage of Australians read the RBA governor Glenn Stevens’ statement when he makes an annoucement. And I won’t bore you with it.
But like Denis Denuto’s character in “The Castle”, you need to understand the “vibe of the thing”.
And the vibe is that the RBA is really concerned that Australia could be headed into a dark place. That would be getting sucked into the sovereign debt black hole that’s gobbling up Europe, country by country.
How does the European debt crisis affect Australia? It’s more indirect than direct. The RBA says the stats show Asian production is being impacted by slowing orders from Europe. And who supplies all the raw stuff that Asia uses to make finished stuff to send to Europe?
Yup. Us. If Asia doesn’t get orders for their widgets, we don’t get orders for our dirt. And if Australian ports are empty, fewer of us have jobs.
If you’ve got the average mortgage (about $300,000), this second RBA cut means you’ll be saving $46 a month in interest. That could be as much as $90 a month less in interest for the November and December cuts.
If you want to play things smart, here are the Dr Debt Man’s orders.
Don’t cut your loan repayments. Most banks won’t adjust your weekly/monthly repayment downwards, so leave them there. The extra $92 a month will save you about 2.5 years on a 25-year home loan and nearly $34,000 in interest.
Stockpile cash. If your repayment was reduced, you’ve got to fight the urge to splurge. The RBA cuts rates to put more money in your pockets because of fear of what might be coming. You don’t have to spend it. Start building a personal warchest.
Get rid of dumb debt. If you’ve still got credit card debt or furniture loans, divert the money you’re saving on your home loan to paying down those loans, where the interest is far higher.
Hit your bank up for an even better rate. On 30 September, I wrote a column urging West readers to call their bank, mention “competitors” and “lower rates” and then ask for “a payout figure”. That will generally spark a call from a “retention officer”, who will, in all likelihood, quickly deliver you a rate cut to stop you going to a competitor.
I did exactly that in September and I got a 0.24 percentage point rate reduction from my bank – nearly as good as a cut from the RBA itself.
Following that column, I got many emails from West readers saying they’d saved between $2000 and $10,000 a year from following that advice. I didn’t get any from people saying the “threat” hadn’t worked.
By all means, if you’ve got a mortgage and you’ve just scored a rate cut, spend a little more this Christmas. But don’t melt the plastic on your credit card. If you increase your spending because of this rate cut by $500 this festive season, you’ll still be paying off the extra spending in June next year.
Bruce Brammall is the author of Debt Man Walking (www.debtman.com.au) and a licensed financial adviser. bruce@debtman.com.au .