INTEREST rate cuts are a welcome relief for investors – just make sure that extra money doesn’t go to waste.
Most people with a mortgage always have their fingers crossed for an interest-rate cut.
However, hoping and wishing for a rate cut is one thing.
Sensibly using the extra cash freed up by the cut is another.
Borrowers shouldn’t use rate reductions as an excuse to sit tight and not shop around, because by doing so they could be missing out on even bigger savings.
Investors Club chief executive Kevin Young says property investors could already be taking advantage of the May and June cuts and prepare for another cut in September.
“How Australia’s 1.7 million property investors use their newly acquired funds and manage their loans effectively could make or break their portfolios,” Mr Young says.
“With just half a per cent drop in interest rates, investors with an average mortgage of $400,000 will save up to $6240 per year.”
Catapult Wealth director Tony Catt says many investors use their properties as a forced savings plan.
“You should use the extra money from a rate cut to pay off your loan faster,” Mr Catt says.
“If you leave the repayments as they are you actually increase your equity faster.”
However, if investors also have a mortgage on their place of residence, that’s the first place to pay off as interest on investment properties is a tax deduction.
Another option is preparing for a rainy day, he says.
“Use opportunities like this to get ahead of repayments or give yourself some room to move in case tenants leave or you need to make repairs.”
Mr Young says a drop in interest rates can bring confidence back to the market so investors should move quickly but research thoroughly.
“This makes it a great time to buy before people start coming back to the market,” Mr Young says.
“But be smart. Ensure your pick of the market will yield the best value in the long term.”
Property also is appealing for superannuation investment, Mr Young says.
“Residential property investment has achieved higher returns than shares measured in both 10-year and 20-year periods up to December 31 last year,” he says.
“Residential growth rates were 8 per cent per annum and 9 per cent per annum respectively while Australian shares returned only 6.1 per cent per annum and 8.7 per cent per annum.”
By switching to a low-rate loan, borrowers with a $300,000 mortgage could save over $230 each month in repayments on a 0.25 percent reduction from the Reserve Bank, according to RateCity.
By maintaining higher repayments borrowers could save almost $80,000 of interest over 25 years and be mortgage-free more than five years sooner. To work out how much you could potentially save by switching or simply by increasing your repayments try using a mortgage calculator.
Experts agree investors should always seek independent advice.