Coronavirus finance help: Sage advice for uncertain times

Out-of-cycle cash rate cuts, economic stimulus packages, social distancing, panic buying at the grocery store – change is the “new normal” in this COVID-19-era world. When it comes to all things money, it can feel hard to work out what to do. Canstar experts take a look, to help you batten down your financial hatches.
RBA cut march - woman on laptop
Source: Antonio Guillem (Shutterstock)

The Reserve Bank of Australia’s (RBA) latest rate cut (on 19 March, 2020) was the nation’s first out-of-cycle reduction since 1997, leaving the official cash rate at an all-time low of 0.25%. The move comes just two weeks after the RBA revised the rate down to 0.50% at its regularly scheduled board meeting on 3 March.

RBA chief Philip Lowe said it was hoped the cut would help offset the calamity caused by the global COVID-19 outbreak. The fallout from the virus had put share markets into a wild rollercoaster of falls and gains and had caused widespread concern that a recession could be about to hit Australia. Job losses have already started to happen, as the federal government’s social isolation rules shut down pubs, clubs, cafes, entertainment venues and events, and travel bans scour the tourism industry. The RBA has also announced a range of other measures, including buying government bonds on the secondary market and lowering the price of money for banks, particularly if they lend to small businesses.

However, Canstar finance expert Steve Mickenbecker believed that it was unlikely this cut to the cash rate will do what it is meant to – kickstart the economy.

“Loan repayment savings have not found their way into retailers’ tills, as borrowers are reacting to the uncertain environment logically and getting ahead on their loans,” he said.

“No amount of encouragement at the moment will get consumers spending on anything other than the necessities.”

He said the hoarding of items such as pantry staples and toilet paper would not be much help, either.

“With the stockpiling it is bringing forward the future weekly household budget spend at the expense of future sales,” he said.

But will the banks pass on this cut?

“There is little point in the RBA saving what’s left of the cash rate for a rainy day when today is a cyclone,” Mr Mickenbecker said.

“The major banks are likely to feel the obligation to cut again, especially if they too are convinced that this is the last of the cuts and that the announced RBA support measures will be sustained.”

Immediately after the RBA announcement, the Commonwealth Bank declared that it had cut some home loan rates, effective 30 March. Today, National Australia Bank announced cuts to their fixed rates, which will kick in on 25 March, before CommBank’s changes. (Consumers can compare these new rates with other home loans on Canstar’s database  on the date they become effective.)

With so many changes impacting everyday finances, Canstar takes a look at some measures consumers might consider taking to help shore up their financial wellbeing:

Government gives green light to access a portion of super

The Federal Government announced on 22 March that people experiencing financial difficulty through the coronavirus crisis would be able to access part of their super. Previously, account holders could only do this in a few limited scenarios.

However, in response to the crisis, Prime Minister Scott Morrison said that “individuals in financial stress as a result of the coronavirus to access up to $10,000 of their superannuation in (this financial year) and a further $10,000 in 2020-21”.

“Eligible individuals will be able to apply online through (government services access portal) myGov for access of up to $10,000 of their superannuation before 1 July 2020,” Mr Morrison said. “They will also be able to access up to a further $10,000 from 1 July 2020 for another three months. They will not need to pay tax on amounts released and the money they withdraw will not affect Centrelink or Veterans’ Affairs payments.”

Mr Morrison said the Government was “temporarily reducing superannuation minimum drawdown requirements for account based pensions and similar products by 50% for 2019-20 and 2020-21”.

More details about the scheme have been released by the government: Coronavirus – Can I Withdraw My Super Early To Pay Off Debt?

Remember the mantra – ‘It’s a long-term investment’

The Australian sharemarket is down more than 31% since its 20 February peak of 7,190 points, and is swinging wildly on a daily basis. This means the balances of many superannuation accounts – which include shares in their investment mix – have gone down, too.

Canstar money expert Effie Zahos said it was important to resist the urge to “make an investment decision based on fear”, which could negatively impact superannuation balances in the long run. That could include a decision to move from a super account investment profile featuring shares to a cash-only profile.

“Super is a long-term savings vehicle, and performance needs to be considered over the long term,” she said.

“The sharemarket may have gone down 31%, but the impact on super is probably not as bad as that. For example, a ‘balanced’ fund account would generally not have gone down that full amount because it’s diversified (it includes a range of investments that spread risk). Changing your investment mix now could risk locking in your losses.”

Canstar analysis of the latest available figures on our database (16 March, 2020), shows that the average “default investment” super fund which had a balance of $100,000 on 1 February would have slipped back by around $13,000. Accounts with a balance of $500,000 would have fallen by more than $63,000. These changes are less than half the rate of the tumble of the sharemarket.

Average Change in Superannuation Fund Balances (Default Investment Option) – 1 February 2020 to 16 March 2020
Balance at 1 Feb 2020 Average Change Balance at 16 Mar 2020
% Change Value
$100,000 -12.65% -$12,648 $87,352
$500,000 -12.65% -$63,238 $436,762
Source:  www.canstar.com.au 16/03/2020.  Average change based on the change in unit prices from 1 February 2020 to 16 March 2020, for the default investment option of a selection of 19 superannuation funds.

However, Ms Zahos said “super funds will take a hit in the short term”.

“It’s perhaps best not to look at your super balance now unless you really have to – wait until the market calms down. Rest assured, this is not the first time super fund managers have seen a correction in the market. Since they were first introduced, super funds have seen a year of negative return three times – they recovered every time,” she said.

“Stay calm, don’t act in fear, and, if you are really worried, perhaps call your super fund, get some expert advice, some reassurance.”

Ms Zahos said retirees or people close to retirement – or those who were considering accessing their super early due to financial hardship – needed to be cautious so as not to “crystallise” any on-paper losses.

“It’s probably best to get some expert advice,” she said. “And don’t forget, you are still receiving dividends into your super account from shares.”

Since the Global Financial Crisis – the last big economic dip the world endured that saw super fund balances drop – a default investment option account with a balance of $100,000 had risen in value by more than 86% (to 10 March, 2020), Canstar analysis shows.

How Default and Cash Superannuation Investment Options Have Performed Since the Global Financial Crisis
Investment Option Balance at 1 Oct 2007 Average Change Balance at 10 Mar 2020
% Change Value
Default $100,000 86.2% $86,188 $186,188
Cash $100,000 42.3% $42,268 $142,268
Source:  www.canstar.com.au – 10/03/2020.  Average change based on the change in unit prices from 1 October 2007 to 10 March 2020, for the Default and Cash investment options of a selection of 6 superannuation funds.
A graph of the Australian sharemarket over time
This chart shows various share classes and how they have performed over time, to 31 January, 2020. Key events are also highlighted. Source: Vanguard

And to give you a broader picture of how different types of investments have grown over time, this chart shows various asset classes and how they have performed from the year 2000 to 31 January, 2020. Key events are also highlighted.

Get the best deal you can and put the savings to work

Home loan interest rates were at historic lows before this latest cut, and are now expected to fall even further.

Canstar analysis shows that between 1-18 March, the average variable home loan interest rate on our database fell by 0.24 percentage points, which is almost the full March cash rate reduction of 0.25 percentage points. The average fixed rate fell more than the cash rate reduction – by 0.33 percentage points. However, there is a wide gap between the lowest and highest interest rates recorded on our database.

Owner-Occupier Principal and Interest Home Loan Rates, 18 March, 2020
  Basic Standard Package Average 1 Year 2 Year 3 Year 4 Year 5 Year
  Variable Variable Variable Variable Fixed Fixed Fixed Fixed Fixed
Min 2.49% 2.44% 2.80% 2.44% 2.64% 2.49% 2.49% 2.70% 2.70%
Max 5.04% 6.57% 4.54% 6.57% 5.06% 4.95% 5.05% 4.14% 4.85%
Source: www.canstar.com.au. Based on owner-occupier loans available for a loan size of $400,000, 80% LVR and principal & interest repayments in Canstar’s database. Includes new to bank interest rates (including specials). Excludes honeymoon, intro-rate, and first home buyer only home loans.

How does your loan stack up? Compare all home loans on Canstar’s database. 

This latest RBA cut would bring further savings for homeowners, Mr Mickenbecker predicted.

“A 0.25 percentage point cut in home loan rates would mean monthly repayments on the average $400,000 loan falling by $56, provided the banks fully pass on the 0.25%,” he said.

Canstar money expert Effie Zahos said homeowners could make the most of this rate cut by making the reduction work for them. She said a few strategies worth considering could include:

  • Keep repayments the same: If households don’t need a boost to their cash flow then they should keep their repayments the same, despite any rate cuts. This will continue to give them a buffer for whenever they may need. Households who have taken a hit to their cash flow could either reduce their repayments in line with their minimum monthly repayments or consider refinancing their home loan isn’t one the interest rate leaders.
  • Access any extra repayments that are sitting in your offset or redraw: Homeowners who had a mortgage for several years and have elected to keep their repayments steady despite rate cuts could find themselves sitting in a stronger position. If cash flow problems arise, then this is one option that could help fund that shortfall. Be aware, though, that if your money is sitting in a redraw facility, conditions may apply around how much and how often you can take money out. Fees could also apply so it’s worth reading the fine print here.
  • Reduce repayments and access the extra cash: Households who have taken a hit to their cash flow could either reduce their repayments in line with their minimum monthly repayments or consider refinancing their home loan if it isn’t one the interest rate leaders.

Ms Zahos encouraged home loan customers who were experiencing financial difficulty – or who thought their income might be at risk in this current economic climate – to talk to their bank. She said many banks are introducing special measures to help their customers during this unsettling economic time.

“If you are ahead on your loan repayments, ask your bank if they can use the excess as loan repayments,” she said.

“If you think you could have trouble ahead, let them know. And if you are in financial hardship, there are a range of measures banks have in place that could help. They could restructure your package – perhaps change your loan to interest- only for a time, or increase the term of your loan which lowers repayments. There could be a solution.”

There are still rates on offer above 2%, or could you use it in an offset account on your home loan?

If consumers don’t want to tie up their money in a term deposit or invest it elsewhere, savings accounts are typically where cash is parked. However, Mr Mickenbecker said successive RBA cash rate cuts had resulted in many banks slashing the interest rates on these accounts, too. He said it could be worth shopping around for a better rate as there were several products on Canstar’s database still offering a rate beginning with a “2”.

“Another cut would see many savers unhappy, on the back end of 18 months of cuts to savings rates,” he said.

“With the base interest rates for savings accounts at the major banks and many others down at around 0.05%, there is no room to move these down further and the slide will be in bonus rates and introductory rates.”

He said people were eyeing off savings accounts as a potentially lower-risk choice for their funds than investing in the stock market.

“Some people who have invested in the sharemarket could be looking at the 2% interest rates on savings accounts right now and deciding that earning 2% is better than earning nothing in shares,” he said.

Savings account interest rate changes on Canstar’s database, recorded between 1-18 March, 2020:

Flexible Savers (Savings accounts without Conditions)
Min Max
Base Rate 0.05% 1.50%
Promo Rate 0.60% 2.30%
Total Rate 0.10% 2.65%
Source: www.canstar.com.au, , 19/03/2019. Savings account interest rates based on a deposit balance of $10,000, paying a base rate of at least 0.05% p.a. Includes accounts that allow flexible access to balances whilst paying an interest rate. Promo rate means promotional or introductory rates that are offered to new customers for a limited time.
Bonus Savers (Savings Accounts with Conditional Bonuses)
Base Rate 0.00% 1.15%
Promo Rate 0.75% 1.90%
Bonus Rate 0.10% 1.80%
Total Rate 0.15% 2.00%
Source: www.canstar.com.au, 19/03/2019. Savings account interest rates based on a deposit balance of $10,000 and accounts paying a total rate of at least 0.1% p.a. Includes accounts that pay a bonus rate when conditions are met. Bonus rate means ongoing bonus rates that are paid when conditions are met on a monthly basis.

 

Another option for savings might be to consider setting up an offset account on your home loan.

“That would effectively deliver you a 3% return on your money, but not in interest paid on the account, more like an interest and time reduction on your home loan,” Mr Mickenbecker said.

Is my money safe in a bank?

The Australian Government guarantees up to $250,000 funds in official Australian Deposit-taking Institutions (ADI). That means if one of the banks on that ADI list becomes bankrupt, the government will repay customers up to $250,000 of the total funds they have with that bank.

“Canstar only lists ADIs in our savings, transaction and term deposit comparison database,” Mr Mickenbecker said.

“So when you use our site to compare, say, savings accounts, and you see a brand that you might not be familiar with, you can be reassured that they are covered by the government. So you don’t have to go with a known brand or one with a branch on every corner, you could choose a smaller lender which has a better rate and still be covered by the $250,000 guarantee.”

Shop around: A higher rate could help offset falls

Term deposit account holders can likely expect their rates to be cut further, if past history can be used as a guide. Canstar analysis of accounts on our database shows that rates, on average, fall roughly in tandem with the official cash rate. In June last year, before the RBA began reducing the official cash rate, the average rate on a 12-month term deposit (of $50,000) was 2.42%. By 17 March, that rate was 1.36%, a fall of 1.06 percentage points. The cash rate fell by 1 percentage point over that time.

In June last year, 12-month term deposit account holders who had invested $50,000 would have earned more than $1,200 in interest at the end of the term. However, that figure had been slashed by more than 40% to about $527 by 17 March, 2020. A reduction of a further 0.25 percentage points on that average rate would erode earnings even further, by another $125.

However, Canstar’s database also shows that as of 18 March, there was a 1.4 percentage point difference between the lowest and highest term deposit account rates for a deposit of $10,000 – more than the reductions caused by the cash rate cuts. Analysis of rate changes since 1 March, 2020, shows that some banks have actually increased interest rates on 12-month term deposits – that average increase (where there was one) was 0.11 percentage points. Those accounts that experienced a decrease since the start of this month (where there was one) showed an average reduction of 0.19 percentage points.

Term Deposit interest rate changes on Canstar’s database, recorded between 1-18 March, 2020:

Term Deposits
Term Min Max
1 Month 0.15% 1.50%
2 Months 0.25% 1.50%
3 Months 0.50% 1.80%
6 Months 0.50% 1.90%
9 Months 0.35% 1.85%
1 Year 0.55% 1.95%
2 Years 0.80% 2.00%
3 Years 0.60% 2.05%
4 Years 0.55% 2.10%
5 Years 0.50% 2.15%
Source: www.canstar.com.au. Rates based on a deposit amount of $10,000 and include one interest rate per term (where available) for each term deposit product in Canstar’s database.

How does your savings account stack up? Compare all ADI term deposit accounts on Canstar’s database. 

Mr Mickenbecker said term deposit rates were still typically higher than other forms of savings accounts, although there were some solid deals on offer for savings accounts.

“If a term deposit is close to maturity, check what rates are available,” he said. “Don’t tie yourself to a specific term of, for example, six or 12 months, take a look at all options. Look for the best rate, and then call your bank and tell them that you’ve found a better rate. Perhaps they will match it. If they don’t, then you could potentially consider switching banks. The only issue is that you might lose a day or two of interest, depending on how you transfer the money across from one bank to the other.”