ADVICE

What an interest rate rise could mean for your situation

Rates are set to rise, but there is no need for panic stations

The message from the Reserve Bank this month was clear: rates are going up, but not right now.

There is no need to panic - it is unlikely interest rates will go up by more than 1.5 per cent in the next three years.

In any event, increasing rates will have no material effect on retirees who have chosen term deposits over superannuation. It's a different matter for people who have a loan, or who are thinking of taking one out.

For existing borrowers on variable rates there will be enormous pressure from the banks to move to a fixed rate. But make haste slowly - a fixed rate is a form of insurance, and insurance always has a cost.

At date of writing, the Commonwealth Bank's variable rate was 2.29 per cent and their five-year fixed rate was 3.79 per cent. But these are just the basic rates - you need to look at the comparison rate, which is the rate you actually pay when all fees are factored in.

CommBank's variable rate of 2.29 per cent has a comparison rate of 2.30 per cent, but the fixed-rate loan at 3.79 per cent has a comparison rate of 4.24 per cent.

This is one hell of a price to pay for the cost of fixing the rate. Furthermore, although the terms and conditions with fixed rates vary from bank to bank, in most cases you could easily find yourself stuck with an expensive, inflexible loan if you move from a variable to a fixed rate loan.

Interest rate rises put up the cost of money. This reduces the size of the loan that borrowers can qualify for, which means they have less spending power when they go to buy a home. The outcome will be that house prices will tend to fall or stay flat; rents will tend to rise, because many potential home-buyers will decide to continue renting.

Any increase in interest rates, or even the prospect of an increase, means that banks will wind up the national interest rate they use to assess how much you can borrow. It's usually around 3 per cent above the current variable rate, but it varies from bank to bank and is constantly changing.

To make it worse, lending criteria also vary from bank to bank, which can have a huge difference in the amount you can borrow. This is why I recommend anybody looking to borrow should talk to a mortgage broker, who can explore the options available and recommend a loan that fits their needs and resources.

If you are getting finance, make sure you give yourself enough time for the bank paperwork to be completed. In three states already the standard real estate contract has been changed to make it simpler for a buyer to request five business days' extension on the eve of settlement if the bank has not got their paperwork done on time.

Interest rate rises also signal danger for anybody who has signed a contract to buy off the plan. You may have received an indication of how much you could borrow when you signed an unconditional contract to buy for settlement one or two years away, but you could find yourself in a very difficult position when settlement is due if the bank then says you can borrow much less than they indicated when you signed the contract.

In the worst case, you could find yourself without the funds to complete the deal. Possible consequences of that include loss of your deposit and legal action from the vendor requiring you to make good any losses the vendor incurred because you were unable to complete the purchase. And if contracts start falling over because purchasers can't complete, the lender's valuer may decide to lower the valuation of the property. This would begin a vicious cycle that makes it even tougher for purchasers, who would need to borrow more money or raise a bigger deposit.

So rate rises can mean very different things depending on your situation. Make sure you stay alert to what interest rates mean for you; it's better to be alert than alarmed, and certainly better than to be caught out.

Noel answers your money questions

Question

My husband and I have always had joint bank accounts, but recently he received a cheque from our bank to compensate him for a mistake they made in fees.

hey claim the reason they sent a cheque was that the money was for him only, and it was not appropriate that they deposited it into our joint bank account. However, we took the cheque to the bank and banked that into our joint account without a problem.

My question is do we need separate accounts and what happens if one of us passes away?

Answer

I don't think separate accounts are necessary in the normal scheme of things, but my bank manager tells me that separate accounts can be very convenient if one of you passes away. Even though the proceeds automatically go to the survivor the joint account could be put on hold while the deceased estate gets processed.

Question

I am a senior citizen and have $40,000 of capital losses from some shares I bought and which show no sign of ever recovering. I'm not in a situation where I can ever see myself using up those capital losses by making capital gains and wonder if it's possible for my children or grandchildren to make use of those capital losses? I'm sure there are many people in my position. I still own the shares.

Answer

It would be pointless to sell the shares while you are still alive as the capital losses could not be used. However, if you leave the shares to your family in your will they will inherit them at your cost base, that is what you paid for them. They can sell the shares when they deem appropriate and use up the capital loss.

Question

I plan to retire in the next few months or so and have annual and long service leave totalling approximately $12,500. I intended to have this amount paid out in a lump sum, but recently read an article which said I would lose out on employer super contributions if I did it this way.

It recommended that I have to any outstanding leave paid out on a weekly basis like my pay. Do you agree?

Answer

Working through your annual leave and long service leave before retiring is a good strategy as you also get to accrue more leave during that time and you might find retirement doesn't suit you as much as you thought.

It also smooths out the tax. A possible downside is that your age pension may be affected in the short-term if you intend to apply for it straight away and you are income tested.

  • Noel Whittaker is the author of Retirement Made Simple and numerous other books on personal finance. His advice is general in nature and readers should seek their own professional advice before making any financial decisions. Email: noel@noelwhittaker.com.au

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This story Rates are set to rise, but there is no need for panic stations first appeared on The Canberra Times.