The Reserve Bank kept the cash rate at 2.50 per cent this week, and forecast that interest rates will be very low for some time. It’s a good idea to take advantage of this environment while it lasts, so here are my top tips to make the most of it.
1. Reduce non-mortgage debt: Before taking on any more loans, pay down your most expensive debt, which will probably be credit card, store finance or a personal loan. In a very low interest rate environment, don’t be caught paying 15 to 20 per cent.
2. Buy a house: If you can get a mortgage at 5 per cent, you should think very seriously about getting a home loan and using the low-cost debt to own an appreciating asset and replace your rent. Keep in mind that property is a long-term investment and rates can and will go up, so make sure you are prepared.
3. Principal reductions off your mortgage: A period of low interest rates is a good time to reduce your mortgage because small amounts of cash go a long way. If you had a $300,000 variable rate loan at 5.2 per cent, over 30 years, you would pay $1648 a month. If you added $25 a week to the repayment, you’d save more than $45,000, and you’d pay back the loan four years faster.
4. Use your mortgage to reduce expensive debt: As you build equity in your property (the difference between the property’s value and what you owe) you can think about refinancing the mortgage and consolidating your high-interest debt into your low-interest mortgage. However, while consolidation can provide cashflow relief, you should always try to keep your repayments at the same level so you’re not extending your debt.
5. Investing: With low interest rates on mortgages, think about using your home loan to build wealth by leveraging investments. You could buy an investment property – but ensure the property is in an in-demand area, with prospects for capital appreciation, and that it doesn’t need too much maintenance. Alternatively, use the equity in your main property to borrow to fund a share portfolio. Whatever you choose, get advice from people who don’t profit from your investment.
Taking advantage of low interest rates comes down to reducing high-interest debt and ensuring that your mortgage is at the best market rate.
If you can get a $300,000, 30-year home loan for 4.7 per cent instead of 5.7 per cent, you’ll pay $186 less a month. I’m sure you can find better things to do with that money than lose it to interest payments.
Even when interest rates are low, you still have to focus on good information and good decisions. Most importantly, you have to take advantage of the opportunity. It won’t last forever.
Mark Bouris is executive chairman of wealth management company Yellow Brick Road, which sells home loans and other financial products: ybr.com.au