As widely expected, financial institutions have gradually been increasing their mortgage interest rates especially the longer term fixed rate offerings. This has been triggered by expectations of higher US interest rates following the Trump election victory.
These are early days yet to assess just how expansionary the proposed US tax reductions and new infrastructure expenditure will be. The US dollar has fallen from recent highs but could quickly strengthen if the proposal to lower the company tax rate on repatriated profits from overseas subsidiaries is introduced.
Amongst other things this would boost US investment and discourage reinvestment of profits overseas. A stronger US dollar is not good news for our economy even though it reduces the value of our dollar because of our reliance on both short and longer term capital inflows including to our banking system to fund home mortgages.
While our AAA credit rating remains intact, it's coming under pressure from continuing large federal deficits and the lack of clear guidance about how soon this situation will change. Against this background and despite a relatively sluggish economy, the outlook is for higher interest rates even if, as appears likely, the Reserve Bank holds the cash rate at current low levels.
At a personal level, even though both share and property markets are performing well, the higher prices now prevailing have increased investment risks. This has increased the attractions of pursuing debt reduction strategies as a way of building family wealth.
Indeed, the safest and most certain way to build wealth is to concentrate on paying off a home mortgage as quickly as possible. Achieving this goal is greatly assisted by the low interest rates still prevailing and the added benefit is that the interest saved by reducing an owner-occupied home mortgage is not taxable.
The benefit of paying off investment loans is not as large because the interest paid is tax deductible. This reduces the interest rate payable and also helps to cushion the impact of any interest rate rises. Even so, where loan valuation ratios are high and any owner-occupied mortgage has been paid off, concentrating on reducing an investment loan even to a neutrally geared position can have benefits. These include reducing borrowing risks and facilitating further borrowings for new investments when the opportunities arise.
An alternative savings option to people not wanting to tie money up untouchable in super till at least age 60 is to pay off the family home and then build up a portfolio using gearing, debt repayment and re-borrowing for new investments. Compared to super, the big advantage of this strategy is that money can be accessed before retirement age should it be needed.
Daryl Dixon is the executive chairman of Dixon Advisory