Impact on the Economy
Impact on your budget
The United States, Europe, Canada and other countries in the world have cut their benchmark interest rates (i.e. cash rates) by substantial proportions to reduce the cost of borrowing, we can expect interest rates to be at record levels. Recently, the Council of Financial Regulators (CFR) which includes the Reserve Bank of Australia (RBA) has stated the regulatory response to the economic threat posed by the coronavirus (COVID-19) outbreak.
Impact on your job security & the silver lining?
While there will likely be layoffs, many economists don’t expect them to be widespread, but rather concentrated in certain industries. For example, jobs in the tourism, hospitality, and travel industries are at the forefront bearing the economic impacts and uncertainty. Moreover, other industries like manufacturing with a strong reliance on a supply chain. However, COVID-19 restrictions had disrupted the logistics and supply chain sector. Based on the assumption that employment remains somewhat healthy, we should see the property market hold steady without the need for homeowners to sell their properties in huge proportions as a result of being unable to pay off their debt. Thanks to APRA and other relevant organisations overseeing the banking industry and creating strict credit requirements to obtain housing finance.
Your recession checklist: How to prepare for a recession
As the probability of a recession increases, the best risk mitigation action to take would be reviewing your financial situation to prepare for a recession.
1. Review your minimum cash reserve
We need reserve to cover our rainy days. The necessary amount is generally based on how many months you would like a cash reserve to last if you experience loss of income and unexpected expenses. Loss of income takes place in the form of loss of a job, default of any debtors, change in investment income including rental income and particularly dividends. The primary objective of a cash reserve is to cover cash flow, to prepare yourself for a recession temporarily, instead of forever.
Situations in which your cash flow is strong and unlikely to be impacted, you may consider a 6-month window for absolutely worst-case scenarios. However, if cash flow is an area of uncertainty, you may require a healthy level of the reserve to cover a minimum of 12 months or at a point in which you can safely sell your current property at a price larger than the current debt owing.
2. Review your current cash flow and budget
Generally, home debt is the biggest expense per month. Yes, interest rates are at record low levels but not all banks are adopting the rate cute. If Australia enters a recession, property value can plummet and meeting loan repayments could be difficult. The most effective expense reduction to prepare for a recession is to reduce your biggest expense. In fact, competition in the mortgage market is at record levels with enticing refinance offers with the process taking 5-6 business days. Remember, the time in the refinance process will protect you in the future and save you money instantly. So, ensure you have a finance professional by your side at this delicate time of huge uncertainty.
3. Working out your financial risk mitigation plan
Next, the risk events of income reduction, expense increase or worse yet, being exposed to the virus will have dramatic impacts on your life and the lives of your loved ones. It should not be a matter of ‘if’ a risk event, rather a question of ‘when’ it happens. Ensure you have a clear protection plan in place including life insurance, income protection, and trauma. The value? Peace of mind knowing that you are covered if the worst were to happen.
4. Speaking with a financial advisor
Speaking with a financial advisor can be advantageous. This is because you may find an insider view of the market; and possibly a deeper understanding of where you stand financially, personally, and under your superannuation fund.
5. Reviewing your income status (if you’re self-employed)
Low-doc loans are classified as high risk for lenders. Therefore, they charge higher costs and lend to up to 80% of the property value. Getting a full-doc standard loan will provide financial benefits and savings. In other situations, considering a full-time permanent job with less income to become a full doc loan holder may result in mortgage rates dropping potentially saving more for you. This could outweigh the loss of your work income.
Investors are anxiously waiting for the number of coronavirus cases to peak and then start to decline to indicate that the worst is behind. As North America’s cases continue to escalate; other countries that are delayed like India and Egypt should likely see a similar trend. Some analysts and the RBA are predicting a rebound in the second half of the year. Although a recession may be imminent, the recovery may not be far away.
Disclaimer: The information provided is general in nature and does not constitute financial advice. Please speak to us for recommendations on your individual circumstance and requirements.
Mitchelle Katsande is Head of Marketing and Communications at Benevolence Financial Group. Mitchelle currently holds a degree in International Business and Finance and is currently supported by Macquarie University Incubator and City of Parramatta Council.