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Using rate cuts wisely

Like most people I was very happy to see the Banks reduce their interest rates in the wake of the Reserve Bank of Australia’s recent decision. After all, reduced interest rates mean less costs for Home Owners. It means less costs, plus more capacity to borrow for investors.

Therein lays the difference between the two groups.

Serious investors see an interest rate cut as an opportunity to increase borrowings, while Home Owners see it as a way to reduce costs.

Does cutting costs mean more savings? Logically you would think that it does. After all, most Lenders trumpet their new lower rates by telling us how much we will save per month. So if we suddenly have all this money left over every month what do we do with it? Where does it go?

I fear that for the majority of people it simply gets lost.

Well, a simple way to make sure you use the extra money wisely is not to have it in the first place. Studies have shown that the more money we earn the more we spend. So simply don’t let the money from the rate cut get into your hands in the first place.

If you have a Principal & Interest Home Loan, make sure the repayments stay the same. Advise the Bank that you don’t want any reduction in your repayment. The “saved” money is now actively reducing your loan for you. Of course, you still can’t get it back from the Bank if you need it because the problem with Principal & Interest loans is that the Bank keeps the principal amount. To get it back you have to borrow. They make the rules about borrowing so you have to meet their criteria to get your own money back. Hmmm, not really fair is it?

For an investor the scenario is much the same. However, the difference is in the scale and the size of the money left over. The bigger your investment property portfolio, the bigger the reductions. Overall, the Interest Only repayments on a number of loans will have reduced. The total required repayments are now lower so less of your own income is required to go towards servicing the portfolio. However, that surplus amount should be directed to your owner occupied debt. We want that debt to be reduced as quickly as possible so more equity is available to invest with.

Of course the key to all of this is to be aware of where your money goes. Be aware of what comes in and what goes out. That’s called budgeting. Somebody said to me once that their budget method consisted of knowing when they got paid. Not exactly scientific or accurate either I’d suggest.

The experts are predicting another drop in interest rates when the Reserve Bank meets in March.

That could be another opportunity for an investor to increase their equity or a Home Owner to see their loan balance reduce.

Which one are you? And how will you best take advantage of the next rate cut? If you’d like some advice on how to do so, please feel free to contact me at vincent@investorsdirect.com.au

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Investors Direct Financial Group

Investors Direct Financial Group (IDFG) was established in 2001.
Our mission is to help our clients achieve and maintain their financial freedom.

Members of the IDFG Group include:
  • Nanmon Financial Services Pty Ltd, trading as Investors Direct Financial Group (ABN: 52 097 697 820 ; ACL: 402950)
  • ID Property Advisory Pty Ltd (ABN: 69 141 716 412 ; Real Estate Licence: 071792L)
  • Investors Direct Financial Planning Pty Ltd(ABN: 50 141 139 228 ; AFSL: 385827)
  • Investors Direct Property Management Pty Ltd (ABN: 59 153 184 859 ; Real Estate Licence:073458L)
  • 8 Star Homes Pty Ltd (ABN: 83 135 066 876)
  • Investors Direct Financial Services Pty Ltd ACN 608 410 591
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