The RBNZ has made the surprise move to cut the official cash rate again in March by 25 basis points, down to 2.25%. While this will no doubt be great news for Kiwis who currently have a mortgage, it’s not so good for those still saving, or those trying to afford retirement! It is, though, a great opportunity for those who have debt to really get ahead on their personal wealth accumulation.
Here are some ways to potentially put the cash rate cut to good use.
Pay off personal debt
Any debt that isn’t a tax deduction – such as your own mortgage, or your credit card debt or any personal loans you have – should be a primary target of any spare cash that you have. And ideally, target your highest interest rate debt first.
While the official cash rate now is just 2.25%, interest rates on personal loans are quite a bit higher – between 9.99% and a whopping 22.96% for unsecured personal loans on our database (based on a 20,000 loan for 5 years), and between 9.90% and 13.95% for secured personal loans. Credit card interest rates are higher again. So it makes sense to put any home loan repayment savings towards this high interest rate debt and to get rid of it.
Here’s an example of how much you could save in credit card interest by increasing your repayments:
|Repayment $120 per month||Repayment $200 per month|
|Debt of $5,000@ 17% interest||Will take 5 years & 3 months to pay off, at a total cost of $7,442||Will take 2 years & 7 months to pay off at a total cost of $6,108|
Paying extra onto your home loan can also save you significant money and free up your cashflow sooner. Based on a home loan over 25 years at an interest rate of 5.78% (the current average floating rate on CANSTAR’s database), an extra $300 per month in repayments would potentially see your home loan paid off in the following timeframe:
|Loan size||Time to pay off|
|$300,000||18 years, 10 months|
|$400,000||20 years, 1 month|
|$500,000||20 years, 10 months|
|$600,000||21 years, 5 months|
Contribute to KiwiSaver
While you cannot access your retirement nest egg until, well, retirement, there is no question that putting some money into KiwiSaver is a good idea. So taking advantage of lower interest rates and diverting some excess funds into your superannuation can potentially be a terrific investment strategy (always check with your financial adviser, of course).
While the government announced last year that new members will no longer receive the $1,000 kick start, there are still plenty of reasons to join. Indeed, more than 2.59 million New Zealanders already have, with the government advising that KiwiSaver membership numbers stood at approximately 2,591,000 at the end of January 2016. And the good news is that the majority of members have voluntarily opted in.
Improving your property
Lower interest rates and mortgage repayments could also pose an ideal opportunity to divert the excess cash towards property repairs or improvements. If it’s your own home it obviously makes it nicer to live in and if it’s an investment property it can make it more desirable in the eyes of a prospective tenant. A fresh coat of paint, some new carpet or beautifully-polished floorboards could make a world of difference. Some new garden beds, a gleaming kitchen – or a gleaming new bathroom – could enable you to boost your rent.
Of course, if spending money on your home or investment property is on the cards, ensure that you calculate your costs precisely to prevent your expenses from blowing out. And with regards to investment properties, get professional advice to ensure that you understand what expenditure can be claimed as an expense for tax purposes and what is a capital expenditure.