Fixed or Variable Interest?
A big question for a lot of people right now.
With the first rise in the cash rate by the Reserve Bank of Australia (RBA) in over 18 months being announced in May followed up by a double whammy rise in June there has been a lot of talk around the office and with our clients about interest rates and whether people should consider fixing portions of their debt. In fact, it may not just be you asking yourself, your bank may also be asking you to fix some debt right now.
With any article like this we have to point out this will be entirely dependent on your circumstances, and you should discuss this with your Accountant and Bank Manager before making any decisions.
The answer to this question all really comes down to what is being offered by your bank. What variable rate are they offering and what rate and terms are they offering on fixed. Once you have this information you then need to consider what the difference between the variable rate and fixed rate are and whether you believe the variable rate will overtake the fixed rate over the term you are comparing.
Did we really just ask you to guess what the rates are going to do? Yes to an extent, unfortunately with any decision like this there will always be a bit of guesswork involved. However, we can use a number of things to assist us with these decisions including forecasts from both the banks and economists as well as historical data of the cash rate changes from the RBA.
At the moment we are finding that the difference between the variable rates and fixed rates being offered by banks is considerable. Fixed seems to be anywhere from 1-4% higher than what is being offered on a variable rate and goes up as the terms of the fixed loan increases.
Below we have outlined an example:
Business A has debt of $1M and an overdraft which averages about $250k over the year. Their current rates are:
Overdraft 2.8% Variable
Term Loan 2.5% Variable
They have been discussing their options of fixing their debt and approached the bank to get their options. The rates the bank offered are:
1 Year Fixed 4%
2 Year Fixed 4.8%
3 Year Fixed 5%
4 Year Fixed 5.05%
They do some calculations and determine that if they fixed for 12 months they would pay $49k in interest but if they stayed variable their interest would be $42k for that 12 month period. This is even if the RBA were to increase the cash rate 1.5% over the next 12 months they would still be better off to stay variable then to fix for any of those periods of time based on the current information.
Now we know that the cash rate has just increased by 0.75% in just two months and so you do need to really consider your options, do some research and speak to your Accountant and Bank Manager who can help with information and calculations. You may find that fixing some debt will be the most beneficial for you but all we are saying is to take a pause and make some considerations before making that decision. Some other points to consider are:
Home loan variable rates tend to move in line with the RBA cash rate while business and commercial loan rates move more in line with the money market and are currently moving up slightly quicker than home loans.
If there is a possibility that you will pay off a lot of debt or want to move banks during a fixed rate term there will be a payout penalty that is often far more than any saving that you may have made with a fixed rate.
People often talk of fixing so they can ‘sleep at night’ but before jumping the gun just consider whether you would be happy that you are committing to paying more interest now and possibly also over the full fixed term compared to the chance that the variable rate considerably surpasses the fixed rate being offered.
Please get in touch with us if you have any questions or would like us to show you some possible outcomes.
10 Ways to Save on your Weekly Grocery Shop
By Ligaya Ninte
If you have noticed recently that your grocery and petrol is nibbling away at your wallet, you are not alone. Price hikes in food and petrol are hitting everyone around the world and unfortunately it doesn’t look like it is slowing down anytime soon. Grocery shopping can make up a big portion of the weekly family budget, and with money tight, we have put together some easy ways you can make savings on your food shop.
1. Always take a list with you and stick to it
Save money on groceries by having a shopping list. This is our number one tip to save money. When you are out of something, write it down and by the end of the week you’ll have a list of things to buy that you actually use. Avoid walking into a supermarket unprepared and never shop for groceries when you’re hungry – it is a well-known fact that being hungry can increase your shopping bill, so beware! Once you are in store also resist adding to your list with impulse purchases by completely avoiding aisles that don’t contain items on your list.
2. Shop online to help resist impulse purchases
Do your grocery shop online when you can as it’s easy to see what products you regularly purchase are on sale.
3. Only buy what you need
Don’t overstock on sale items. Just because something is on sale doesn’t mean you need to buy a year’s supply of it. Plus take into account the expected shelf life of the product. Most popular items go on sale on a rotating cycle. Keep in mind how much you need when shopping.
4. Know how to store food properly
Learn how to store food correctly to prolong its life. Learning to store food properly is an essential part of saving money and keeping you and your family safe. You can learn to easily distinguish the food items that may be kept out on the counter, items that need to be kept cool, and items that need to be frozen. You can reduce the amount of food you throw out if you start storing them properly. This hint also helps with not adding to landfill.
5. Make your own DIY Cleaning products
Reduce cleaning supply bills by making your own cleaning products for a fraction of the cost, this also assists with cupboard overflow. Typical household items such as bicarbonate soda and vinegar make ideal cleaning products.
6. Never buy pre-packaged and pre-cut items
Don’t pay extra for someone to do common kitchen chores for you. Pre-packaged lettuce, pre-cut fruit and grated cheese are more expensive for the small convenience it brings you. Basically, you are paying someone to do a job you could easily do at home, so keep that in mind the next time you are deciding on a full head of lettuce versus washed lettuce in a plastic bag.
7. Plan your weekly meals
Meal planning is also an easy way to save money on groceries. Base your shopping list on what meals you could make with the ingredients you currently have in your pantry or fridge. Add any additional ingredients required for those recipes to the shopping list. Ten minutes a week meal planning can save you hundreds over the year and help reduce food waste in your home. Making a larger quantity of your favourite meal can result in a nice lunch the next day or a meal already cooked for later in the week – remember our correct storage tip!
8. Go generic, it won’t kill you.
You have probably heard this tip before, but it really is true. The generic alternative is usually cheaper and can be just as good. You’ll likely end up spending a whole lot less for something that tastes almost the same. Just check the ingredients to be sure you are getting the same product and of course is it Australian made where possible – always try to buy local as it keeps money in our local community – but make sure you are comparing apples with apples.
9. Shop alone
Shop alone where possible – shopping with your spouse or children can cause you to spend more money than you intended to.
10. Set an actual budget
When you go to the shop, know exactly how much you can spend and stick to that limit. Before you can make a realistic grocery budget, you must have a realistic idea of what you usually spend. Start tracking what you spend for a month and keep your receipts. The key is to track everything that you consume. It is also important that you review your budget on a regular basis to be sure you are staying on track. Small savings can add up, so don’t overlook the little stuff. You might be surprised at how much extra money you accumulate by making one minor adjustment at a time.
We understand that not all of these tips will work for everyone! We all have busy lives and may not have the luxury of sticking by some of these tips (I would LOVE to be able to shop alone!). But if you can even stick to 2-3 of them it could really help you save some money.