Five ways to protect your finances from a COVID-19 hangover

The economic impact of COVID-19 is expected to last for two years, according to research from accounting firm KPMG. But there are ways that everyday Aussies can protect their finances for the foreseeable future.

Two-year COVID-19 hangover

Research obtained by The Australian from KPMG indicates that it may take until at least September next year for the Australian economy to recover – 18 months after the coronavirus began to adversely affect the country.

This research also shows “economic activity in the accommodation and food services sector will be half what it was by June 2020 before charting a long and painful return to pre-COVID levels of output by March 2022, almost two years later”, according to The Australian.

This two-year slow return is similarly predicted for the retail sector, with arts and recreation expected to suffer a “40 per cent hit to output”, staying at low levels until December 2022, as noted in the KPMG research.

Is now the time to withdraw superannuation?

Meanwhile, Australians that are doing it tough have been turning to their superannuation as a means to get through the COVID-19 economic strain.

The Australian Prudential Regulation Authority’s (APRA’s) latest data on the temporary early release of superannuation scheme showed that, as of 3 May, superannuation funds had issued early release payments to 830,000 members worth a total of $6.3 billion.

Aussies who withdrew their super took a payment of $7,629, on average. The average processing time was 3.1 days after receiving the application from the Australian Tax Office.

However, some experts aren’t convinced that this is the wisest move to make.

ISA Chief Executive Officer Bernie Dean said of the superannuation scheme: “It is tempting to tap into your super early, some may want to do so as a savings buffer, but nothing in life is for free and cracking open your nest egg comes at steep cost – it should be treated as a last resort.”

Further, Chant West data found that median growth superannuation funds declined by about 10 per cent in the three months to March 2020. With further economic decline expected, some Aussies may be wondering if withdrawing from their already impacted super is really the best option available.

Ways to protect your finances from Covid-19

There are other ways everyday Aussies can try to protect their finances now, so that they may potentially be in a safer position over the next two years.

  • 1. Refinance to a lower rate home loan

COVID-19’s impact on the economy has been significant, but for homeowners there is a silver lining. Interest rates are the lowest they’ve been in history, thanks to five Reserve Bank of Australia (RBA) cash rate cuts since June last year. This means there are historically low interest rates up for grabs for those in a position to refinance to a lower rate lender.

For example, if you had a $350,000 30-year mortgage with the average variable, owner-occupier, principal and interest mortgage rate for April of 3.46 per cent, your monthly repayments would be $1,564.

However, if you switched to one of the lowest rate loans on the market of 2.09%, your repayments would be $1,309. This is a potential saving of $255 a month, or $3,060 a year.

Lowest fixed home loan rates for owner-occupiers

Lender Loan Advertised rate (%) Comparison rate (%)
ING Orange Advantage Home Loan Fixed 2 Years

2.09

3.77

Reduce Home Loans Home Owners Dream Fixed 3 Years

2.09

2.63

Freedom Lend Freedom Fixed Home Loan 2 Years

2.09

2.68

Source: RateCity.com.au. Data accurate as of 13.05.2020.

Lowest variable home loan rates for owner-occupiers

Lender Loan Advertised rate (%) Comparison rate (%)
Homestar Finance Star Gold Home Loan

2.29

2.32

Reduce Home Loans Rate Slasher Variable Home Loan

2.39

2.40

Well Home Loans Well Balanced Home Loan

2.47

2.50

Source: RateCity.com.au. Data accurate as of 13.05.2020.

  • 2. Pay off your debt(s)

Whether you’ve lost your income or fallen ill, it’s a challenging enough time without having to worry about how you’ll pay off your debts.

RateCity’s Debt Guide can help you get out of debt and put yourself in a better financial position for the future.

If you have multiple sources of debt, trying to manage them may have become increasingly difficult. One option you may consider is a debt consolidation loan. This allows you to roll your existing debts into one loan, so you can simplify how much interest you’re paying, as well as cut down on fees and other costs.

If you have credit card debt, personal loans generally have lower interest rates than credit cards. This may help prevent your debt from getting out of control.

  • 3. Switch to a lower rate credit card

If you have a credit card with a high interest rate, and you’re often unable to pay your credit card balance off each payment cycle, you may want to consider switching to a lower rate option.

Whether it’s with your current credit card provider or with a new provider, comparison tables can help you compare new low-rate options you might switch to. Just be sure to check out what fees and other costs may be associated with a card swap.

 

  • 4. Switch up your savings accounts

As the RBA has cut the cash rate to historic lows, interest rates on savings accounts have followed suit. You may feel as if your savings account is nothing more than a safe place to store your money. However, there are still savings accounts offering interest rates above inflation (2.2% according to the RBA), if you’re willing to switch.

Some savings accounts provide high interest rates as a bonus offer for an introductory period. Once that period ends, your interest rate reverts to their standard rate, which is typically much lower.

These introductory rates may be able to survive RBA cash rate cuts. The big four banks have promised that the bonus rate you earn will be locked in for the entire introductory period. Not all banks do this, so keep this in mind when you’re doing your research.

If you’re willing to put in the time and effort, you could hop between high-interest savings account. This would involve switching to savings accounts with high-interest introductory offers and switching again whenever the offer ends. While this process may involve some paperwork and effort, it could see your savings account better off over the next two years.

  • 5. Lock in a high TD rate

One way to ensure your savings have a locked-in interest rate is to consider a term deposit account.

Term deposits allow you to put your money in a secured deposit for an agreed period of time. It will earn a set interest rate for that time frame too, so if the RBA were to cut cash rates further, your interest rate wouldn’t change.

Highest 3-year term deposit rates

Company Interest rate (%)
Judo Bank

2.05

Greater Bank

1.60

The Mutual

1.60

Source: RateCity.com.au. Data accurate as of 13.05.2020.

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Learn more about home loans

What happens to my home loan when interest rates rise?

If you are on a variable rate home loan, every so often your rate will be subject to increases and decreases. Rate changes are determined by your lender, not the Reserve Bank of Australia, however often when the RBA changes the cash rate, a number of banks will follow suit, at least to some extent. You can use RateCity cash rate to check how the latest interest rate change affected your mortgage interest rate.

When your rate rises, you will be required to pay your bank more each month in mortgage repayments. Similarly, if your interest rate is cut, then your monthly repayments will decrease. Your lender will notify you of what your new repayments will be, although you can do the calculations yourself, and compare other home loan rates using our mortgage calculator.

There is no way of conclusively predicting when interest rates will go up or down on home loans so if you prefer a more stable approach consider opting for a fixed rate loan.

What is the difference between fixed, variable and split rates?

Fixed rate

A fixed rate home loan is a loan where the interest rate is set for a certain amount of time, usually between one and 15 years. The advantage of a fixed rate is that you know exactly how much your repayments will be for the duration of the fixed term. There are some disadvantages to fixing that you need to be aware of. Some products won’t let you make extra repayments, or offer tools such as an offset account to help you reduce your interest, while others will charge a significant break fee if you decide to terminate the loan before the fixed period finishes.

Variable rate

A variable rate home loan is one where the interest rate can and will change over the course of your loan. The rate is determined by your lender, not the Reserve Bank of Australia, so while the cash rate might go down, your bank may decide not to follow suit, although they do broadly follow market conditions. One of the upsides of variable rates is that they are typically more flexible than their fixed rate counterparts which means that a lot of these products will let you make extra repayments and offer features such as offset accounts.

Split rates home loans

A split loan lets you fix a portion of your loan, and leave the remainder on a variable rate so you get a bet each way on fixed and variable rates. A split loan is a good option for someone who wants the peace of mind that regular repayments can provide but still wants to retain some of the additional features variable loans typically provide such as an offset account. Of course, with most things in life, split loans are still a trade-off. If the variable rate goes down, for example, the lower interest rates will only apply to the section that you didn’t fix.

What is a variable home loan?

A variable rate home loan is one where the interest rate can and will change over the course of your loan. The rate is determined by your lender, not the Reserve Bank of Australia, so while the cash rate might go down, your bank may decide not to follow suit, although they do broadly follow market conditions. One of the upsides of variable rates is that they are typically more flexible than their fixed rate counterparts which means that a lot of these products will let you make extra repayments and offer features such as offset accounts.

What is a comparison rate?

The comparison rate is a more inclusive way of comparing home loans that factors in not only on the interest rate but also the majority of upfront and ongoing charges that add to the total cost of a home loan.

The rate is calculated using an industry-wide formula based on a $150,000 loan over a 25-year period and includes things like revert rates after an introductory or fixed rate period, application fees and monthly account keeping fees.

In Australia, all lenders are required by law to publish the comparison rate alongside their advertised rate so people can compare products easily.

What is the best interest rate for a mortgage?

The fastest way to find out what the lowest interest rates on the market are is to use a comparison website.

While a low interest rate is highly preferable, it is not the only factor that will determine whether a particular loan is right for you.

Loans with low interest rates can often include hidden catches, such as high fees or a period of low rates which jumps up after the introductory period has ended.

To work out the best value for money, have a look at a loan’s comparison rate and read the fine print to get across all the fees and charges that you could be theoretically charged over the life of the loan.

What is a standard variable rate (SVR)?

The standard variable rate (SVR) is the interest rate a lender applies to their standard home loan. It is a variable interest rate which is normally used as a benchmark from which they price their other variable rate home loan products.

A standard variable rate home loan typically includes most, if not all the features the lender has on offer, such as an offset account, but it often comes with a higher interest rate attached than their most ‘basic’ product on offer (usually referred to as their basic variable rate mortgage).

What is a honeymoon rate and honeymoon period?

Also known as the ‘introductory rate’ or ‘bait rate’, a honeymoon rate is a special low interest rate applied to loans for an initial period to attract more borrowers. The honeymoon period when this lower rate applies usually varies from six months to one year. The rate can be fixed, capped or variable for the first 12 months of the loan. At the end of the term, the loan reverts to the standard variable rate.

What is a fixed home loan?

A fixed rate home loan is a loan where the interest rate is set for a certain amount of time, usually between one and 15 years. The advantage of a fixed rate is that you know exactly how much your repayments will be for the duration of the fixed term. There are some disadvantages to fixing that you need to be aware of. Some products won’t let you make extra repayments, or offer tools such as an offset account to help you reduce your interest, while others will charge a significant break fee if you decide to terminate the loan before the fixed period finishes.

What is the difference between a fixed rate and variable rate?

A variable rate can fluctuate over the life of a loan as determined by your lender. While the rate is broadly reflective of market conditions, including the Reserve Bank’s cash rate, it is by no means the sole determining factor in your bank’s decision-making process.

A fixed rate is one which is set for a period of time, regardless of market fluctuations. Fixed rates can be as short as one year or as long as 15 years however after this time it will revert to a variable rate, unless you negotiate with your bank to enter into another fixed term agreement

Variable rates is that they are typically more flexible than their fixed rate counterparts which means that a lot of these products will let you make extra repayments and offer features such as offset accounts however fixed rates do offer customers a level of security by knowing exactly how much they need to set aside each month.

Interest Rate

Your current home loan interest rate. To accurately calculate how much you could save, an accurate interest figure is required. If you are not certain, check your bank statement or log into your mortgage account.

How do I know if I have to pay LMI?

Each lender has its own policies, but as a general rule you will have to pay lender’s mortgage insurance (LMI) if your loan-to-value ratio (LVR) exceeds 80 per cent. This applies whether you’re taking out a new home loan or you’re refinancing.

If you’re looking to buy a property, you can use this LMI calculator to work out how much you’re likely to be charged in LMI.

What happens when you default on your mortgage?

A mortgage default occurs when you are 90 days or more behind on your mortgage repayments. Late repayments will often incur a late fee on top of the amount owed which will continue to gather interest along with the remaining principal amount.

If you do default on a mortgage repayment you should try and catch up in next month’s payment. If this isn’t possible, and missing payments is going to become a regular issue, you need to contact your lender as soon as possible to organise an alternative payment schedule and discuss further options.

You may also want to talk to a financial counsellor. 

How personalised is my rating?

Real Time Ratings produces instant scores for loan products and updates them based what you tell us about what you’re looking for in a loan. In that sense, we believe the ratings are as close as you get to personalised; the more you tell us, the more we customise to ratings to your needs. Some borrowers value flexibility, while others want the lowest cost loan. Your preferences will be reflected in the rating. 

We also take a shorter term, more realistic view of how long borrowers hold onto their loan, which gives you a better idea about the true borrowing costs. We take your loan details and calculate how much each of the relevent loans would cost you on average each month over the next five years. We assess the overall flexibility of each loan and give you an easy indication of which ones are likely to adjust to your needs over time. 

How often is your data updated?

We work closely with lenders to get updates as quick as possible, with updates made the same day wherever possible.