Over the past month, we have seen the Reserve Bank of Australia (RBA) pause its seemingly endless increase in cash rates.

This increasing cash rate has been implemented to curb inflation. However, for many, this has just exacerbated the issue of making ends meet as interest rates on home mortgages, investment loans, car loans and personal loans significantly rise. Coupled with the increased cost of living for goods and services, much of the hard earned income is now consumed with little to nothing left over for other activities like a holiday.

The days of a near zero cash rate and low interest rates seem well behind us; hoping it will return there soon is unlikely. For those who took out loans over the past few years or are still working through repayment of previous loans, the question has now been posed, “should I sell assets to cover the debts and pay my bills?”

The answer is a resounding – it depends

Each person is different, and an individual’s financial position must be considered, which means the answer can change.

Selling assets such as investment properties, shares or downsizing the car can assist with a quick amount of cash that can reduce debt and give some much-needed breathing room to the weekly cash flow. With ever present credit card bills, loan repayments and the ‘after pay’ credit systems (and associated high interest rates) this may be very beneficial.

You may look to sell your investment property, pay the debt, and then invest the remaining equity in a different investment like shares or real estate income trusts (if you want to stay in property). Selling some shares can give that sudden cash injection needed.

On the surface, this seems like a great approach. Lowering the loan-to-value (LVR) ratio leads to better cash flow and the added benefit that lending institutions may consider refinancing at a lower rate if the LVR has been reduced (always ask – it does not hurt). So what are the potential downsides?

  • Are you selling the asset at a bad time in the market and not optimising the asset value?
  • Will selling the asset create a significant capital gain, offsetting the cashflow savings?
  • Are you selling an income generating asset at the expense of tightening the budget and potentially impacting your long-term retirement goal for time of retirement or income in retirement?

Which asset is the right one to sell?

Each scenario is different and the assets and loans in play are different – there is no one answer.

The key is to make your decision an informed one. Your financial adviser is here to help discuss the situation, identify the pros and cons and help determine how the decision works with your financial goals and risk profile.

Please note this article provides general advice only and has not taken your personal, business or financial circumstances into consideration. If you would like more tailored advice, visit our Personal Financial Planning services page or contact us today.