Depending on how large a cut you receive, you might decide to spend the money, either on essentials or other items. But it might be worth considering a few alternatives. For example, younger Australians might be able to make their money go further by topping up their super, whereas others might feel that their debt obligations are more pressing.

Below, we explore some of the benefits associated with these and other options.

Put the money in a high interest savings account

It’s no secret that the Reserve Bank’s ratcheting up of interest rates is intended to discourage people from spending. It does this partly by increasing how much household income is required to service debt, but also by making saving more appealing. With rates on savings accounts having risen from their early pandemic lows, you might consider finding a high interest savings account to deposit your tax cut.

Of course, the prospect of more attractive returns isn’t the only reason to save. Contractionary monetary policy tends to put the country on shaky economic footing (as RBA Governor Michelle Bullock’s talk of walking a “narrow path” serves to remind us), and many people are concerned about job loss or reductions in income. Putting the extra money directly in your savings can serve as a useful buffer if you find yourself out of work or facing some surprise expense.

Top up your super

If you want to think more long-term and are happy to lock the money away, you might consider topping up your super. One of the main benefits worth highlighting here is the preferential tax treatment super receives. Assuming your contribution is treated as coming from your pre-tax income — meaning you can claim it as a deduction on your tax return — it will generally be taxed at 15% instead of your marginal tax rate, which is typically much higher. Any investment earnings within the fund will also be taxed at 15%.

For this lower tax rate to apply to your personal contributions, you’ll need to submit a Notice of Intent form to your super fund at the earliest of the following: before you complete your next tax return, before 30 June of the following financial year, or before you move money out of the super fund.

Just keep in mind that any contributions which you claim a tax deduction for will count towards your concessional contributions cap, which is currently set to $30,000. What’s more, the money you contribute won’t be accessible until you meet a condition of release (such as reaching age 60 and retiring). So before you make any decisions, think carefully about any other financial obligations you might have and whether you’d rather have the money on hand.

Pay down your home loan

If you’re one of the many borrowers who has been struggling to adjust to the higher interest rate environment, directing any extra money you have towards your mortgage might help ease some of that stress, while also saving you interest over the long run. And the good news is that money saved doesn’t attract any tax, unlike earnings from investments or savings accounts.

If your loan comes with an offset account, you might choose to deposit the money there instead of making extra repayments on your mortgage. The two options are functionally similar — in that both lower the balance on which your lender charges interest — but with an offset account, you’ll be able to access that money whenever you wish.

Pay down other debt

Even if you don’t have a mortgage, there might be other debts you can chip away at. Your credit card debt, for example, might not seem urgent but it has the potential to snowball over time depending on how high the interest rate is. Easing your debt burden now might help to free up money in the future to spend in other ways. Just be mindful that not all loans allow free extra repayments, and some go so far as to apply an early repayment fee if you manage to pay down your loan ahead of schedule.

In the end, what you decide to do with your tax cut will depend on your personal circumstances and goals. If you’re unsure how to make the most of your tax cut, consider speaking to a qualified financial adviser.

Sources

1 NAB

Written and accurate as at: Oct 13, 2022 Current Stats & Facts

Watching your mortgage repayments go up months on end may be causing a fair bit of anxiety in your household. It’s no wonder, with many lenders passing on rate hikes to customers in step with the RBA. As an example, according to one source, in the May-September period this year, the cumulative rise in repayments has added more than $1,000 a month on a $800,000 loan*.

Depending on your loan arrangements, getting a lower rate—either with your current lender or by moving to a new lender—could potentially save you hundreds, if not thousands, of dollars a year in interest repayments.

But negotiating doesn’t come naturally to some of us, and interestingly, historically borrowers with home loans between three and five years old, on average, have been paying around 58 basis points above the average interest rate for new loans^#.

So, are there steps that you can take to try and reduce your home loan repayments? We asked Catherine Denney, Mortgage Broker at Nook Money to share some ‘inside’ tips, which may help increase your chances of negotiating a lower home loan rate.

1. Do your research

Before you pick up the phone to your bank, do your research to find out how your current rate (and other home loan features/attributes) compares to those offered by other lenders. There are three important areas to research:

• The rate your current lender is offering to new customers. Lenders usually offer a lower rate to new customers to attract new business. It seems unfair (and it is), but it’s the way the market works. Finding this out could be as simple as visiting your lender’s website, or consider asking your broker.
• The best rate being offered by one of your lender’s major competitors. It’s important that it’s a major competitor to your lender, otherwise they may not give it much credence. If you’re not sure who the main competitors are, consider asking a broker.When comparing rates, it can be a good idea to make sure you’re comparing the ‘comparison rate’, not the advertised headline rate. The comparison rate represents the true cost of the loan, and all lenders are legally obliged to provide one. The comparison rate takes into account the interest rate, but also fees and charges that apply.Just as important is to consider comparing your current loan from a holistic perspective—comparing against those with similar product or loan arrangement features. For example, if you have a package loan, then comparing it to the package loan from the competitor. If you have an investment property loan, making sure you’re not looking at the competitor’s owner-occupied loan rates (which are usually cheaper).

  If the comparison is not like for like, then it probably won’t be a valid reference point for your lender to benchmark against.

  You also need to consider things such as your LVR—or Loan-to-value ratio (i.e. the size of your loan compared to the property value). Lenders tend to typically charge higher interest rates for loans over 80% LVR (because the loan is considered higher risk) and many may offer bigger discounts for loans under 70% LVR (or thereabouts). Therefore, what you’re seeing on the lender’s website may not be a rate that is available to you.

• Any cashback offers being offered in the market for refinances. This could help to boost your case for leaving when you speak to your current lender.

2. Know your selling points and limitations

It’s important to bear in mind that certain factors can help your case for a lower interest rate, whilst others can hinder it. Being realistic is important in knowing what might be achievable and in feeling satisfied with the outcome of your negotiations. The factors that could help you include, for example:

• Having an LVR under 80% (if it’s lower than 70%, you may have even more negotiating power)
• Having a perfect repayment history
• Having a large loan size (e.g. banks can often fight harder to keep a loan over $1 million)
• Having a package loan (rather than a basic product).

On the other hand, if you have a LVR over 80%, have missed repayments in the past and/or have a small loan size, lenders may often not lower your rate as aggressively (or at all). They also may be less likely to lower your rate if you’re on their basic product.

3. Ring your lender and make your case

When you call your lender, have your research in hand, so you can speak with confidence and clarity. As a potential starting point, tell your lender you would like them to review your current home loan based on the research you have completed (e.g. competitor rates, new customer rates, etc.).

And, if you are a ‘good’ borrower (e.g. a low LVR ratio and / or strong repayment history), be sure to draw the lender’s attention to this to further support your case.

Some lenders may offer you a rate reduction on the spot, while others may go away and review your file and then come back to you with an offer.

With many lenders, you may also find that their first offer is not their best offer—by persisting further and re-emphasising your case, they may offer an even lower rate.

Final thoughts on negotiating your home loan rate

At the end of the day, if your lender is not willing to reduce your interest rate, consider whether you want to remain loyal to them when you may be able to save money by taking your business elsewhere.

Coupled with your interest rate, you may also wish to consider your home loan’s features, and whether there is a cheaper, but still appropriate product available with your lender (or elsewhere). And, if you need help, consider talking to a mortgage broker, as they may be able to do most of the leg work for you, which could end up saving you a lot of time and hassle—bear in mind that a fee may be payable for their services.

Sources:
*  https://www.smh.com.au/business/banking-and-finance/nab-first-to-pass-on-rba-rate-rise-in-full-20220908-p5bgfg.html 
# https://www.accc.gov.au/system/files/Home%20loan%20price%20inquiry%20-%20final%20report.pdf