How can you make the most of record low interest rates?
Many people believed that the low RBA cash interest rate, that had remained unchanged over the last couple of years, was about as low as it would go. But in the last few months the Reserve Bank of Australia (RBA) has dropped it three times, taking the official rate from 1.5 per cent to 0.75 per cent. The question is, why has the RBA dropped it so much, and what does that mean for you and your mortgage?
The short answer is that the economy is not performing as the RBA would like. The good news is that employment is growing, but productivity and inflation growth are not. This means wages are not going up either, and this flat growth means we don’t have as much in our pockets, so we’re not spending as much as we used to, and this is hurting the economy.
KICK-START THE ECONOMY.
The RBA wants to stimulate the economy and its growth by reducing the size of loan repayments. It’s good news for homeowners who’ve been working hard to make payments and will now have a bit of extra cash to spend on things they may have been going without. Businesses are more likely to expand, invest and create new jobs. And more people will be able to get a loan to buy a house, which is already helping inject a bit more life into the property market.
SO WHAT SHOULD YOU DO?
The RBA wants you to do your bit for Australia and start spending, but is this the best thing for you? There are a few different things you can do.
Don’t do a thing.
If your home loan is variable, your lender should reduce the rate of interest you’re being charged and give you the option of reducing your repayments accordingly. The money you’re saving is what the RBA wants you to start putting into the economy to help give it the boost it needs. So, if you’re thinking of buying yourself something special, at least you can tell yourself you’re doing it for everyone.
Start shopping around.
You’ve probably seen in the news that some lenders aren’t passing the full cuts onto their customers. If you’re not happy with your bank’s rate it’s a good time to shop around for a loan from a lender that has passed on all the rate drops. It’s important to review and compare your loan on a regular basis, so please get in touch to make a time to review your current situation – I’m here to help you.
Keep your repayments the same.
If you’re used to what you’re paying you might be happy to keep paying it. With your required repayments being lower, you’ll be paying off more of the principal, which not only reduces the amount your interest is charged on (reducing your required repayments even further), it means you’ll take months or years off your loan.
Save the money.
With rates this low, you’d have to think it’s inevitable they’ll go up one day. Rather than making extra payments you can choose to put the extra cash into savings to build a buffer for any future rises.
There are smarter ways than simply putting money into a basic savings account. Many loans have a redraw facility which lets you put extra payments into a loan, reducing the principal and interest, and allowing you to take out the extra money if and when you need it.
Or there is an offset account – a separate account that’s linked to your loan. Any money in this account will reduce the amount of the loan that interest is calculated on, but the funds are always available for your use if you want them. Even having your salary paid into an offset account will help reduce your interest charges for the time the money is in the account.
Pay off other debt.
Now is a great time to pay off that car loan or credit card that’s attracting higher interest rates than your home loan. Not only will you be reducing your debt, you’re also improving your financial position in the eyes of a lender, which is important if you’re thinking of refinancing or borrowing more to buy your next home.
Invest in a holiday.
Maybe your payments have forced you to sacrifice doing some of the things you’ve always wanted. Now might be a nice time to consider making a personal investment in some aeroplane tickets, and keep the RBA happy by keeping it in Australia with a trip to Broome or the Barrier Reef.
Get in touch.
The best thing about the low interest rates is that you have a little extra in your pocket you can use to help secure a better financial position for you and your family. So perhaps the first thing you should do is chat with us. We would be happy to organise a place and a time to take you through all your options and show you how you can make the most of the interest rate drops based on your individual circumstances and goals.