It’s time to auction your loan: Australian entrepreneur and philanthropist Barry Lambert warns hard times ahead for borrowers
With Australian banks beginning the cycle of raising interest rates, the writing is on the wall for Australian borrowers. For most Australians, the family home is the greatest asset, with ownership a key pillar to a comfortable retirement. But record house prices and elevated debt mean that most Australians will be working for longer to clear the heavy mortgage debt load, limiting capacity for investment outside of the home property, which would be necessary to build a retirement nest egg.
The banks, for their own commercial reasons are putting up interest rates. It’s now time for Australians to be more commercial and make sure they are getting the best deal. It comes down to who can give you the best rate.
Property owners and investors should be aware of the numerous issues that may negatively impact borrowers in the future:
- Australian banks have begun to increase interest rates on both owner occupied and investment property loans.
- The outlook for rising interest rates in the USA and its impact on bank funding costs.
- Reports of pending oversupply of apartments in several cities may negatively impact investment returns. Potential changes to capital gains tax and negative gearing rules. With the Labor Party leading the polls and possibly winning the next election, the party’s proposed changes to both negative gearing rules and capital gains tax will impact demand and supply for property and its value.
- Potential expansion of Land Tax as a form of wealth tax that can’t be avoided, potentially adding extra ongoing costs to owning a property.
- Banks are being asked by regulators to reduce their lending to investors to curb demand. It is also likely they’ll need to hold more capital and improve their funding mix.
With a future environment of increased interest rates, property borrowers need to take action to limit their financial impact. It’s now time to act.
1. The first step is to secure the best deal for your mortgage.
2. The easiest action borrowers can immediately take is to put your loan up for auction on Loan Dolphin to ensure you have the lowest possible rate. You can do this digitally from the convenience of your own lounge and get the banks and brokers fighting to win your business.
3. Set clear targets to pay down your mortgage. Don’t fall into the redraw trap. There are many budget and savings apps that can help you monitor your spending and cash flow needs to help you pay down your debt.
4. If you are holding excess investment property, consider the issues above and reconsider if that is still an appropriate wealth creation strategy.
The interest rate matters. Take a couple or family who have a A$500K loan to repay over 30 years. Assuming an average lifetime interest rate of 6%, this means the interest they will pay is around A$465k and that’s excluding any fees. These repayments are made in after tax dollars, so the couple needs to have earnt A$700K to pay for that interest alone.
By Barry Lambert, March 2017 Disclosure. Barry Lambert is a shareholder in LoanDolphin.