Some interesting information and data has been released this week which I would like to discuss with you.
Variable mortgage rates will probably rise soon
Interest rates that apply to interbank lending have increased significantly since the beginning of the year. These benchmark rates are used to set the banks borrowing costs. This benchmark rate has increased significantly compared to the RBA’s cash rate as depicted in the chart below (from Montgomery). Essentially, this means it costs more for the banks to borrow (which they would like to pass onto their customers). Between approximately one quarter and one third of the banks mortgages are funded through facilities that are linked to these short-term indicator rates. Therefore, it has been estimated that the banks cost of funds have increased by circa 0.10% p.a.
Various second tier lenders such as ING, BoQ, IMB, Citibank, Bank SA, and ME Bank have already increased variable rates.
Pressure will be on the Big 4 banks to follow. However, I suspect that they haven’t increased yet because they are worried about the inevitably bad press that it would attract – particularly for the bank to move first. That said, if these higher costs persist then they might have to lift variable interest rates sooner rather than later (probably by around 0.10% p.a.).
Can you afford principal and interest repayments?
There has been a bit of press lately about a possible looming credit risk i.e. interest only loans converting to principal and interest repayments which might put negative pressure on borrowers cash flow.
If you have a loan on interest only repayments that is approaching its expiry date, you have a few options. You should consider whether you are better off with principal and interest repayments – see this blog. If not, speak to us and we can investigate whether you can roll over to a new 5-year interest only term with your existing or a new lender. Do it sooner rather than later to avoid the risk of being caught by any future changes or credit tightening.
The Reserve Bank (RBA) and interest rates
The main thing holding back the RBA from increasing the cash rate is the rather ‘benign’ inflation rate – including the very low wage inflation rate. The inflation (CPI) numbers for the June quarter were released yesterday and, whilst inflation is only just within the RBA’s target band of 2% and 3%, the main driver of the recent increase was petrol prices. Overall, there’s nothing in the CPI numbers that suggests the RBA will increase interest rates this year or possibly next year.
The best performing super funds for the 2018 financial year
Researcher, Chant West this week released its list of top-performing super funds for the 2017/18 financial year.
I have been very pleased with the performance of the low-cost, indexed model portfolio that we use to invest our clients super. It has retuned 11.52% p.a. over the past year after investment fees.
The median returns by industry funds was 10.3% p.a. compared to 9.0% p.a. for retrial funds. This confirms the Productivity Commissions findings that retail super funds (such as AMP, Colonial, BT and MLC) are typically characterised by higher-fees and lower-returns. If your super is invested with a retail fund, then my advice is to find a better super fund (but get advice before you do as you must consider exit fees, timing, insurance and any other benefits that you might forgo)!
How to pick a super fund
It is tempting to get seduced by one-year returns. However, picking a fund based on its short-term results is fraught with danger. For example, UniSuper ranks number one based on the last 10 years of returns but tenth for the last financial year only – longer-term results matter the most (assuming the investment approach is repeatable).
To pick the best fund, you need to consider the following:
- Past performance – is there a track record of delivering strong investment returns compared to market and peers?
- Fees – fees are certain, returns are not. Therefore, you reduce your risk if you reduce your fees.
- Will history repeat itself – to assess this there needs to be a lot of transparency and accountability with the way money is invested. This will allow you to assess if returns have been the result of random good luck or does the fund employ a proven, rules-based, evidence-based investment approach that is repeatable?
Interestingly, the industry funds’ indexed options have performed poorly. HostPlus’ Indexed Balanced option returned only 7.03% for the year to 31 May 2018 and AustralianSuper’s Indexed Diversified has returned 9.41% to 30 June 2018. The problem with these options is that they tend to be very basic in their construction and only use one type of indexing (market cap indexing). They are designed to fail in my opinion. If your super is invested with an industry fund, I think you would be better off investing in its actively managed (growth or balanced) option – even though this approach contradicts the data (i.e. all the evidence suggests that passive mostly beats active investments).
Of course, if you need help with this decision, don’t hesitate to reach out to us.