After all the talk, October’s decision by the Reserve Bank to cut rates didn’t come as a surprise. The RBA’s call sent the cash rate to a historic low of 0.75 per cent, the third cut inside six months.
The call was the latest attempt by the RBA to drive economic growth, and while much of the current conversation surrounds just how low the RBA can go and how fast, there are some good ways for you to make the most of these new financial conditions.
Shop around for a better deal
Your lender may have already passed the rate cut on to you, but how much? Lenders have passed the last three cuts on to varying levels, so now could be the time to explore the market, compare the options and see if there’s a lower-rate option available.
If you find a new mortgage option that suits your needs, making the switch could save you a lot of money in the long term.
Repay, repay, repay… repay
If you hold a variable-rate loan, you’ll most likely have noticed a drop in your repayment rates as the Reserve Bank pulls the fiscal levers it controls. And there’s an opportunity in the cuts. You could use the low-rate environment as a chance to pay your loan off faster than previously possible. You’ll be saving on interest in the long-term, and potentially shortening the life of your loan.
“Now could be a good time to explore the market, compare the options and see if there’s an even lower rate available.”
If you’re paying off other loans in addition to a mortgage, now could be the right time to take care of them, too. You could use the low-rate environment to pay off credit cards and other debt before you consider investing in property or making additional mortgage repayments.
Leap into the housing market
There are early signs in metropolitan areas that property prices are once again on the rise. The low-rate environment gives first-time buyers a prime opportunity to enter the market, and for homeowners to upgrade. Buying when the time is right could mean taking advantage of record-low rates.
But the current interest rate climate comes with a warning. It can be tempting to borrow more in a low-rate environment than you’d otherwise feel comfortable with. Remember that the average lifespan of an Australian home loan is about 30 years, and rates will rise again at some point. You need to make sure you can make repayments at a higher rate, too.
Consider new ways of investing
The flip side of a low-interest-rate environment is a lack of growth for those who keep their money in the bank. Record low rates mean savings accounts aren’t accruing as much interest as they do when rates are higher, so now could be a good time to think about if you should diversify your investments.
An investment property may be the right place to start. As well as tax benefits, the property can be used to provide additional income and has the potential for strong capital gains in the long term.
Save for when rates rise again
While the debate is raging about what would happen if rates drop to zero or beyond, history tells us rates will eventually rise. If your repayments have dropped, you could put the money you’re saving aside to balance out additional repayments you’ll need to make when rates go back up.
Your lender may allow you to open what’s known as an offset account linked to your mortgage, allowing you to both save money and reduce the interest you’re paying on that loan. Remember, money in an offset account can also be withdrawn to spend if you need it.
Even in a record-low environment, understanding all the options, making a plan and sticking with it is key. A professional mortgage broker will work with you to understand your situation and help you find the best solution.