How to slash your mortgage + RBA slams government

Hello everyone,

Where do I start? What a wild week. Global sharemarkets have been absolutely spooked - more on that and why it is happening later. We also had the Reserve Bank board meeting, and the decision to keep interest rates on hold.

So, let's start unpacking it all.

In this week’s newsletter:

• What the RBA said in its rate decision.

• How you can engineer your own rate cut to ease the financial pressure.

• What’s behind this week’s global sharemarket rout. And should you worry?

• The wild ride in Nvidia shares.

• Your Share Crash Wish List - what the experts are waiting to buy in a market crash.

• Tapping superannuation to buy a home - a solution for politicians to think about.

RBA Governor slams big-spending politicians

I’ve been saying for a while that Australians don’t deserve another interest rate hike to fight inflation, because we are doing the right thing by reigning in inflation. Cost increases are coming from big business lifting prices higher than CPI, cost increases that are beyond our control from global events, and big spending governments pushing up construction costs and soaking up jobs.

Politicians all want to be the good cop by spending up big and leaving the RBA to be the bad cop doing the dirty work of fighting inflation.

As I’ve written before, you can sense RBA Governor Michele Bullock’s frustration at this for a while now. But this week she came out with it and openly blamed state and federal governments for fuelling inflation which was putting pressure on the RBA to raise rates again.

So if there is another rate rise, politicians are solely to blame. Good on her for calling them out. The RBA just has interest rates to fight inflation, while governments have a range of measures to help - but they don’t.

Remember that debate after the May federal budget on whether it was inflationary or not? I think Michele Bullock has answered the debate with a resounding, ‘yes it is’.

While everyone expected the RBA to keep rates on hold this week at 4.35 per cent for the sixth consecutive meeting, according to Michele Bullock, they did discuss a rate hike.

In a statement, the Board highlighted:

“Data have reinforced the need to remain vigilant to upside risks to inflation and the Board is not ruling anything in or out.”

They also indicated there would be no rate cut this year and we’d have to wait well into next year:

“Inflation in underlying terms remains too high, and the latest projections show that it will be some time yet before inflation is sustainably in the target range.”

Don’t wait for the RBA to cut rates - do it yourself with these home loan hacks

The Reserve Bank is not going to save borrowers by cutting interest rates anytime soon. That is the very clear message from RBA Governor Michele Bullock this week. 

But rather than wait for a future official rate cut to ease the cost-of-living crisis it’s now up to us to negotiate our own rate cut. Yep, now is the time for us to take responsibility for our loan repayments.

Inflation is staying too high because governments are spending too much money, which is pushing up costs and soaking up jobs. Some optimistic economists were predicting one rate cut before the end of the year. But that has been rejected by the RBA and it is unlikely to move until well into next year.

Since the rate tightening cycle began in May 2022, a borrower with an average loan size of $626,000 is potentially paying $1,619 more each month. That is financially crippling.

Here are 4 ways to cut your loan repayments. I can almost guarantee they will deliver at least a 0.25 per cent cut in your current repayments.

1. Ring your lender and ask for a discount on the interest rate

If you’ve never asked your lender for a better interest rate, do it right now.

Check the interest rate you’re paying on the home loan. If it’s, God forbid, above 7 per cent then your lender is playing you for a sucker. The average variable home loan rate is around 6.5 per cent.

Some of the rates available from the Big Four Banks show the average difference between front-book (new customer) and back-book (existing customer) home loan rates is a whopping 1.96 per cent. Existing loyal customers are being treated like mugs.

A person with an owner-occupier $750,000 loan could be saving $1,008 a month if they switch from a rate of 8.54 per cent to 6.58 per cent.

All borrowers have to be sceptical of their home loan interest rate and compare it against what their lender, and other lenders, are offering new customers. If you’ve been with your lender for more than a couple years, there’s a good chance you’ve fallen on a higher back book rate and are paying more than you need to be.

2. Your rate should come down as your equity goes up

The general rule of thumb is that the more equity you have in your property, the better the interest rate you’ll get from a lender. Over the last few years many people who took out a loan based on a small level of equity in their property would now have a much larger stake given Australia’s property boom. And that could mean a better interest rate.

Lenders base your home loan rate on your Loan to Valuation Ratio (LVR), that is the size of the loan against the value of the property. Interest rates for borrowers with an LVR of 50-60 per cent could be up to 0.40 per cent less than some of the rates on offer for borrowers with an LVR of 80-90 per cent. 

For a property valued at $500,000, that could be a difference of $1,015 on a borrower’s monthly repayments. 

The national median dwelling value was 32 per cent higher in June 2024 compared to May 2019, according to figures from CoreLogic, meaning a large number of Australian property owners could be sitting on untapped equity. 

Use that increase in equity to get a better rate.

 3. Put savings into an offset account

If you keep a decent balance, an offset account has the potential to help you save money in loan interest and pay off your mortgage sooner. Rather than a normal savings account, an offset account is the perfect place to keep that emergency fund for unexpected bills or any spare cash.

It’s a great incentive to save. And unlike regular savings accounts, you won’t pay tax on the interest you offset.

Having just $25,000 in an offset account for a $500,000 loan with an interest rate of 6.19 per cent could reduce your loan term by three years and one month and save more than $110,000 in interest over the life of the loan.

4. Switch to fortnightly repayments

Making a small change to your repayment schedule could save homeowners tens of thousands of dollars and pay off their loans faster.

A person with a $600,000 loan could save over $160,000 in interest over the life of the loan and cut down their loan term by over five years if they were to switch to fortnightly payments instead of monthly.

You’re not just paying slightly more, you’re paying it back early. You’ll need to tell your bank that you want to pay half of your monthly repayments fortnightly, because if you simply switch to a fortnightly repayment plan, this could be a smaller payment amount, and then this hack might not work for you.

For example, if your monthly payments are $3,694 you will want to pay $1,847 per fortnight. This means you’ll be paying an extra $3,694 each year, which will cut down your principal and interest owed to the bank.

What’s behind the wild global sharemarket swings?

It has been a nerve-racking week for share investors with wild swings and media headlines about it being, “The biggest crash since October 1987”. Naturally a lot of people are spooked right now and can easily panic.

Keep in touch with your broker or financial planner before doing anything rash. History tells us that if you panic and sell, often you miss the rebound which inevitably follows. Re-read this newsletter from a couple of weeks ago about strategies to adopt if the market looks too high.

But what is behind this current global markets rollercoaster?

1. The US economy could be headed for an economic recession

It all started with a  surprise US jobs report, which found only 114,000 jobs had been added in July, far weaker than the forecast 175,000. The unemployment rate picked up to 4.3 per cent, raising concerns about an economic recession.

There is now a fear the Federal Reserve will be cutting rates into a recessionary environment, rather than the previously hoped-for ‘soft landing’. In other words, investors were concerned the Fed changed course on rates too slowly and the economy was now in trouble.  

If that’s the case, markets are concerned it could impact the profits of big companies and affect their share price.

2. Big investors caught by Japan raising interest rates

This is a bit complicated, but this did send shockwaves through financial markets. 

Japan’s economy has been terrible for decades and while the rest of the world has had booming economies and high inflation, Japan has had rolling recessions and deflation. As a result they’ve had official interest rates at zero (yes, 0 per cent) and sometimes even negative interest rates to stimulate the economy.

What some big global institutions investors (superannuation and sovereign funds) have been doing is borrowing money in Japan at very low interest rates and investing in countries paying much higher interest rates. They call it a “carry trade” in financial markets.

When the Bank of Japan put up official interest rates to 0.25 per cent this week, which pushed up the value of the Japanese yen, a lot of these big investors were caught out.

The success of that trade depends on the borrowing currency staying cheap and volatility staying low. Instead, the yen surged and investors were forced to close their positions. It sparked a chaotic “head for the exits” moment.

3. Deflating big US tech stock bubble

For the last year investors have been marvelling at the so-called “Magnificent Seven” US technology giants.: Alphabet (Google’s parent), Meta (Facebook), Amazon, Apple, Microsoft, Tesla and AI chip maker Nvidia. Their share prices have skyrocketed and been the stars of the US market.

But after their surge, a lot of investors believe they are now over-valued and have been taking profits. Legendary investor, Warren Buffett, even sold half his Apple shares.

Nvidia announced delays in the manufacture of its AI chips and during this earnings season so far, companies such as Alphabet, Meta and Amazon have found themselves trying to justify their AI spending bills to increasingly impatient investors.

4. China’s property crisis

And the final reason for this week’s global market rout is the ongoing property market collapse in China.

As a result commodity prices like iron ore, oil and copper continue to be weak and a slowing Chinese economy means its consumers and steel mills don’t buy as much from us.

So you can see this week’s rollercoaster ride was caused by a perfect storm of different factors which created a lot of uncertainty. Markets hate uncertainty and panic when it comes.

Nvidia’s wild ride

‘Blue chip companies’ are meant to be solid performers, predictable and consistent in their returns to investors.

But take a look at this … AI chip maker, Nvidia, is the world’s third most valuable company and the recent star of the US sharemarket. The definition of a blue-chip stock.

The stock has now seen a $US2.2 TRILLION swing in its market cap since July 23. This includes two drops of $US650 billion and $US780 billion, as well as two rallies of $US550 billion and $US250 billion, respectively.

In other words, Nvidia has swung 88 per cent of its current market cap in just nine trading days. That's US$244 billion PER TRADING DAY, for nine straight days.

Hmmm, blue chip? Not really. But a reason why some investors believe this is the top of the technology boom.

“Be fearful when markets are greedy and greedy when markets are fearful,” is one of Warren Buffett’s (founder of Berkshire Hathaway and regarded as one of the best investors in the world) most famous mantras. Translated it means, be careful when markets are booming and investors are greedy because they often lead to unrealistically high valuations. But when markets and investors are fearful, it can lead to undervalued investments because investors are scared about committing.

I reckon this week’s market crash has seen a lot of fear return. Valuations have been hammered. So does this present an opportunity to acquire undervalued stocks?

On my daily sharemarket show, The Call, on the business streaming network ausbiz (www.ausbiz.com.au, ausbiz App, SevenPlus, Samsung SmartTVs), I asked each of our expert analysts for the one stock they’ve been waiting to buy if there was a crash. A stock which they had wished they’d invested in, that they had been waiting for a pullback in share price which had never happened, but is happening now.

Here's what they’d be buying:

• WiseTech - David Lane, Ord Minnett

• Pro Medicus - Kai Chen, MPC Markets

• REA - Shawn Hickman, Market Matters

• PolyNovo - Henry Jennings, Marcus Today

• Pro Medicus - Mark Moreland, Team Invest

• Millford Australian Absolute Growth Fund ETF - Andrew Weiland, DP Wealth Advisory

Is raiding superannuation to buy a first home a solution?

The answer to Australia’s housing affordability problem remains a controversial debate for policymakers while new building supply falls painfully short of demand. 

Grants and handouts? They just fuel higher property prices. 

Put an end to negative gearing? You risk losing investors and rental supply. 

Now, the federal opposition reckons early access to superannuation could be the long-awaited solution. 

Think of super like the molten hot cookies Mum has told you not to touch. They're going to taste so much better when the time is right - an early bite could burn your tongue. You're risking your long-term security for instant gratification. 

But, if you’re smart and disciplined, could you dip in just once and restore it without getting burnt?

I understand the argument that raiding your superannuation will hurt your retirement. But it is your money. And life is about stages, so why shouldn’t you use a lump of super to buy a first home BUT then pay it back so you have the best of all worlds - a house and a good retirement? A bit like HELP for university fees.

The numbers game

I asked the expert team at Compare the Market to crunch the numbers to find out how many extra contributions you’d need to make to recover after using $50,000 towards a deposit. 

We’ve made a few assumptions, including that you’re buying a $500,000 unit in Brisbane with an interest rate of 6.15 per cent. 

First, you’ll need to have saved at least $50,000 on your own for the deposit. The extra $50,000 from your super will raise your contribution to 20 per cent to help you avoid Lenders Mortgage Insurance, which would otherwise have cost you $15,183. 

Remember, you’re not just making up for the $50,000 that you took out, but also having the opportunity to accrue a return on that money. Using the MoneySmart super calculator, we found that $50,000 would grow to around $85,300 over the next 35 years, with an investment return of 7.5 per cent, taking fees into account. 

To recover what you took out, and the potential gains you would have made, you'd have to make extra contributions to your super of at least $131 every month over the next 35 years of your working life. 

That’s potentially about what you’re currently paying for your home internet and phone plan. If you already put that money aside each month, you might find it’s easy to cover. 

The good news is, you may also be able to benefit from a lower tax rate by making a pre-tax salary sacrifice to your super. 

Meanwhile, your repayments would be $305 a month cheaper than if you hadn’t used your super to boost your deposit. And, if you hang onto your property long enough, you’ll benefit from positive equity, which you wouldn’t otherwise have had if you continued renting. 

You’ll also potentially benefit from tax-free capital gains as the value of your home grows - something you’d also be missing out on if you stayed in the rental market.

So, could this actually be a good way to help young Aussies get a foot on the ladder? The modelling above suggests it could be if you’re disciplined and committed to making those extra contributions.

Still, there are several reasons this policy should be approached with caution. 

The other numbers game

House prices have climbed so high that a $50,000 deposit won’t get you far in most cases. The median dwelling in Brisbane costs around $859,000 which calls for a 20 per cent deposit of $171,800. 

Besides, most young people don’t have that much super to draw upon in any case. According to a Deloitte analysis in 2023, an average man in the 25-29 age bracket had $43,500 in super, while women in the same range had just $36,600. 

Unless you’re in a really good position with a large salary, it’s unlikely you’d be able to take out the maximum $50,000, unless the government chipped in.

And, of course, while most property is generally a fairly safe investment, there is always the possibility that something could go wrong. If you were forced to sell with negative equity, you would lose both your house and your retirement nest egg. I can think of very few financial situations that would be more stressful!

The whole point of super is to ensure that people can retire comfortably and confidently without having to rely on the aged pension. But if more people become dependent on social security support, taxpayers could be left to carry the bill. 

Deloitte's modelling suggests that such a policy would increase aged pension spending by $300 billion by the end of the century, even if access were capped at $50,000. 

Putting more cash in buyers' pockets also risks pushing prices up further, rather than making properties more affordable. Analysis by the Super Members Council suggests such a policy would add 9 per cent to median prices in capital cities. 

So, while some savvy savers may be able to make it work, raiding retirement nest eggs might not be such a super idea for everyone.