While interest rates remain at historically low levels in many parts of the world, including Australia, thousands of mortgage holders have enjoyed lower repayments; but interest rate movements mean different things to different people.
Aside from mortgages, low interest rates have a much broader application—they also flow through into personal and investment loans, credit cards and various types of business financing. On the flip side, investors have seen returns on interest-bearing bank accounts and term deposits follow suit and understandably do not celebrate with every rate cut.
Across the economy generally, a low interest rate environment often goes hand-in-hand with slower economic growth, uncertain job prospects and lower asset prices.
So, depending on which category you fit into, here are a few implications worth considering in your approach to dealing with interest rates:
Homeowners: With variable rates remaining low do you use this as an opportunity to build a buffer against rates when they eventually turn around? Or are there other more pressing items that your spare cash could be directed towards, such as credit cards or a car loan? Another issue to consider is your future housing preference. If you would like to renovate or upgrade your home, is now a good time to do this with prices generally stable and tradesmen more likely to return your phone calls?
Investors: Whether your preference is shares, property or another asset class, this may be a good time to consider starting a long-term growth strategy. Given that dividend yields and rents may have changed in the past couple of years, it’s worth another look to determine if potential investments are likely to be positively or negatively geared.
Business owners: Overdrafts, car leasing and other business loans may need a good review. In particular, any strategy to reduce your debt should be revisited. You could take advantage of lower interest offers with another lender, but make sure you balance the potential savings against any costs associated with moving your business to a new bank.
With all time low fixed rates, is it time to consider fixing some of your exposure?
Deposit holders: Dwindling returns on cash may make you feel like there would be little difference if you put it under the mattress. There’s bound to be plenty of apparent alternatives to give your returns a boost but it’s critical to read the fine print and understand what you’re investing in. The adage of higher returns meaning higher risk holds true, so first make sure your ability to manage that risk is properly addressed.
Interest rates will not stay low forever – and this will be good for some and not others. Now is a great to think about how you can use the current situation to your advantage.
To discuss your options further, contact Matt Derham or Sue Cohen – our Mortgage Broking Specialists.