Tommy Lim’s Post

Transcript

So what does this all mean for�� households and the economy? Well,���� this is happening to every household and�� every lender. You're not alone in this,���� but it does mean that there's nowhere to hide�� and the era of historically cheap money is���� well behind us. Looking ahead, we're set to�� enter a season of uncertainty and discomfort,���� especially for lower income households, first home�� buyers and homeowners who bought at the top of the���� market during the mid pandemic liquidity boom. To navigate this time ahead, you have to be���� proactive, you need to move the levers within�� your control to boost cash flow and create���� savings buffers either by increasing income�� or lowering expenditures. And for the savvy���� investors or households who've been waiting on�� the sidelines watching interest rates go up,���� there may actually be some buying opportunities.�� So now more than ever you must keep an eye on the���� economic data and understand the movements of the�� RBA and the Australian banks. In terms of where���� we stand right now, most of Anonymous predict�� the cash rate to hit 4.85% by the end of 2023���� which means you can expect your principal�� and interest home loan rates to hit around���� 6.5% and interest only rates comfortably with�� a 7 in front. So how can you manage this jump?�� To be very practical about this, we've split our�� responses into 5 courses of action. These are:���� negotiating with your current lender, exploring�� basic and advanced refinancing strategies,���� proactive budgeting and income generation and what�� to do if you're experiencing financial distress.�� We'll start with negotiating with your current�� lender which is the quickest and easiest way���� to lower the cost of your home loan once it�� switches to variable. It may surprise you,���� but most lenders will be willing to shave off up�� to 0.5% from your default variable rate, simply���� because they don't want to lose you as a client.�� And if we're talking about a $1 million loan,���� you're probably looking at a jump from a fixed�� rate of 1.95% to 6.5% variable which translates���� to a $2,476 increase in repayments. But if you can�� negotiate that variable rate to 6%, you could take���� repayments down to $5,844 from $6,147 saving you�� $303 per month I know that doesn't seem like a���� lot, but it's a saving you could achieve just�� from a simple phone call or email. It may also���� be the only step you can take if you don't pass�� the serviceability requirements to refinance.�� If you are able to refinance, that would be�� your next course of action with the most basic���� of switches being what brokers call a "dollar�� for dollar" refinancing. This is where a loan���� is switched over to a new lender for the same�� loan amount, for the same remaining loan term���� and for the same repayment type. So the main�� goal with this strategy is to solely achieve���� a better interest rate and reduce your interest�� costs. And in some circumstances refinancing���� may help you achieve more meaningful savings�� than with rate negotiation alone. If I refer���� back to the previous example, in evaluating�� refinance opportunities we typically aim for���� further rate saving of at least another 0.2%. This is something a rate negotiation alone���� cannot achieve. As you can see here we�� were able to bring the rate down from���� the negotiated 6% to 5.8%. Just keep in mind�� that there are costs involved with refinancing,���� so you need to make sure that the rate savings�� outweigh the transaction costs. You also need to���� personally weigh up whether the savings are worth�� the inconvenience of moving your personal banking���� which involves setting up new accounts, applying�� for new cards and instructing new direct debits.�� The third course of action involves more�� advanced refinancing strategies and will���� generally benefit people who need to dramatically�� boost their cash flow, not just lower costs, and���� especially those with a portfolio of loans. But�� these strategies are a little more complex than���� dollar to dollar refinancing, because they involve�� restructuring the repayment type and potentially���� shuffling things around with your loans. Now the�� steepest rate shocks would hit those rolling from���� fixed interest only to variable principal and�� interest loans. Usually investors will set up���� fixed interest only repayments in the initial�� stages of their loans, because it allows them���� to maximise their tax deductible debt while paying�� down their owner occupied loan as fast as possible���� which is not tax deductible. We can see the impact�� of the cliff in these types of situations is much���� more dramatic. If the interest rate goes up from�� 2.49% fixed to 6.6% variable, and repayments go���� from interest only to principal and interest,�� repayments increase from $2,075 to $6,535. The���� only way to mitigate this is to refinance the loan�� back to interest only reducing the repayment shock���� to $533 dollars per month. But this is still a�� 1.5 times increase to the previous fixed rate���� repayment. The other option would be to keep the�� loan on a principal and interest repayment but to���� re-extend the loan term to 30 years. In this case�� repayments would go to $6,060. The repayments are���� still high but definitely more manageable. Now moving on to the fourth course of action���� which would be applicable in any of�� the three strategies we just mentioned,���� and that's proactive budgeting and income�� generation. With the prospect of recession���� around the corner, households need to look at how�� they can boost their cash flow and where possible���� create savings buffers. There are two sides of the�� equation: how can you increase your income and how���� can you cut your expenditures? On the income�� side, ask yourself: can you work more hours,���� take on a second job or a side hustle, earn a�� promotion or switch to performance-based income?���� Maybe you can rent out a spare room in your house�� or convert eligible properties to short-term���� rentals. On the expenditure side, it's time to�� take a hard look at your spending. Are you using���� credit cards beyond your means? Can you stretch�� the life of your positions or buy second hand?���� Can you cut back on discretionary expenses like�� eating out, holidays or unused subscriptions?���� Maybe it's time to consider public schools for�� your kids or renting out your home and living���� somewhere cheaper. Remember every little bit�� helps. Boosting your income and cutting back on���� expenses might just be the trick to get you out of�� mortgage jail if you're struggling to refinance.�� Now, let's talk about the reality that�� some households may face. For some,���� the shock of transitioning from fixed to a�� variable rate will be just too much. This is���� particularly true for lower income households�� with higher loan-to-value ratios and newer���� mortgages. They simply haven't had enough time to�� build up savings and equity buffers to weather a���� period of higher repayments. And of course,�� this could apply to anyone not just those on���� lower income levels. Sometimes life throws us�� curveballs that are beyond our control. The���� death or illness of a primary income earner, job�� loss or having to care for a sick family member���� can all drastically impact household cash flow. So our fifth set of actions is for those already���� experiencing or preempting financial distress. In�� these situations the choices are tough but clear.���� You could firstly call a bank's hardship line or�� speak to your banker about setting up a financial���� arrangement. For example, making partial loan�� repayments or at least paying the interest of���� a loan can buy you some time. Another option�� could be selling property or assets. This is���� a last resort, but it's something that lenders�� may enforce if you default on a secured loan���� and show an inability to repay. For business�� owners, switching from a bank to a non-bank���� or a private lender may help you achieve more�� runway. You can also switch loans to interest���� only or have interest capitalised to preserve your�� cash flow while you trade out of the downturn or���� undertake a measured sale of assets. In all�� these situations, it's crucial to seek help���� early before you run out of cash or are forced to�� sell a property on terms you cannot control. The���� national debt helpline and the mob strong debt�� helpline are great resources for free advice.���� And remember - you're not alone in this. There�� are resources and strategies available to help���� you navigate these challenging times. So here are my final thoughts on all of���� this. There's no doubt that the shock from the�� fixed rate cliff will shape Australia's macro���� economic landscape over the next few years�� impacting household budgets, property prices���� and economic stability as a whole. And so, you're�� going to have to find ways to manage the impact,���� be it through negotiating on your loans,�� refinancing, boosting income or cutting expenses.�� But I don't think that the mass expiry of fixed�� rate loans is going to destabilise the economy and���� be a sole driver of a recession, nor is the�� fixed rate cliff going to crash the housing���� market. So I'm confident that our clients and�� followers will have the resilience, creativity���� and street smarts to come out on the other side�� more financially savvy and prosperous than ever.�� Thanks for watching! If you enjoyed this video�� make sure to subscribe to our Channel and follow���� SF Capital on our socials to stay in the loop�� on all things finance. See you next time!