The decision by the Reserve Bank to further reduce the cash rate provides a world of opportunities for those with mortgage finance and every mortgage holder would be well advised to make the most of these rates while they can.
This interest rate situation may last for quite a while but it may also be short-lived. The truth is, no one knows how long we are going to enjoy these rates.
There are several ways to make the most of the record low interest rates:
Look to reduce debt as much as possible, particularly non-tax-deductible debt
Debt reduction provides the best financial opportunity, particularly for owner-occupiers.
Record low rates tend to focus our intention on the obvious opportunities associated with cheap finance. However, they actually present us all with a powerful opportunity to reduce debts faster.
Take the example of a $500,000 home loan. At an interest rate of 7 per cent (which is the average variable interest rate in Australia in the past 15 years), this requires repayments of $3078 per month over 30 years. At 4.5 per cent, the repayments are $2533, a difference of $545 a month. If you put that $545 saving straight into extra repayments, you would take more than nine years off the home loan term and save nearly $140,000 in interest.
Consolidate expensive debt
While home loan rates are at record lows, the same cannot be said for facilities such as credit cards, personal loans and overdrafts. The gap between home loan rates and the rates charged on facilities such as credit cards has never been wider. While you might be paying 4.5 per cent on your home loan, chances are you’re paying 15 per cent-plus on your credit card.
Now is the time to replace your expensive debt with cheap debt. If you’ve got the equity in your home, it’s a smart strategy.
However, if you do consolidate into your home loan, focus on paying off this component of your home loan debt as soon as possible, so you’re not turning short-term debt into long-term debt.
Consider changing from interest only to principal and interest repayments
Investors, in particular, often have their loan repayments as interest only in order to minimise the demand on their investment property cash flow.
With rates at such low levels, now could be the time to move to principal and interest repayments to reduce the debt and start building more equity in your investment property.
Chances are principal and interest repayments at current rates will be on a par with the interest-only repayments you were paying a year or two ago, so should be easy to manage.
As an investor, you want to look to repay the debt at some stage anyway, so now is the ideal time to start doing so.