How to make the most of record-low interest rates

The Reserve Bank of Australia (RBA) made two cash rate cuts in one month for the first time ever, taking the rate in March to a new record low of 0.25%.

The cash rate has now fallen 1.25% over the last year, after cuts in June, July, and October of last year.

The RBA made the latest cuts to keep the economy afloat as it was hit by a series of shocks caused by the global coronavirus crisis.

Lowering the cash rate tends to push mortgage rates down, meaning people have more disposable income. This improves their household budgets, meaning they are less impacted by the crisis and may even be able to spend more with vulnerable businesses.

So how can you make the absolute most of these rate cuts? loans.com.au is here to help.

How to make the most of rate cuts

It’s easy to get lost in the often complex and confusing jargon that rate cuts and RBA chatter brings. Here’s our easy to understand top tips to make the most of record-low interest rates.

Don’t change your repayments

Rate cuts may be passed to your mortgage rate, provided you have a variable loan. As a result of your rate being lower, your minimum monthly repayment will also reduce.

It’s easy to think “great, more money for me to spend each month!” but not changing your repayments can be hugely beneficial.

Keeping your loan repayments steady means that you’ll repay your home loan sooner, which could save you thousands in interest.

And, if rates do increase, your finances may be easier to manage as you are already paying extra.

It’s also beneficial to not take advantage of the repayment holiday many lenders are offering as a result of the coronavirus crisis.

Putting your repayments on hold for six months sounds great in theory, but interest still accrues in that time, which means you’ll pay more in interest over time.

Unless you are experiencing financial ‘hardship’, the best option is typically to stick to the status quo and keep your repayments as is.

Boost your savings

While record-low interest rates are great for mortgage holders, they’re not so good for savers, with savings account rates repeatedly slashed to abysmal lows.

So if you’ve got extra money as a result of lower mortgage rates, what should you do with it? An offset sub-account could be the answer.

An offset sub-account allows you to put extra money into your loan and withdraw it whenever you want, effectively using it as a spending account.

The main advantage is that the money in the offset sub-account is ‘offset’ against your home loan debt when interest is calculated, reducing the amount of interest charged on your loan.

The more money in your offset sub-account, the less interest you’re charged, meaning more of your regular repayment will go towards paying off this debt, effectively reducing the length of your loan and saving you money.

Use our offset calculator to calculate how much you can save in the long run.

And with savings account rates so low, the rate you are offsetting against is likely to be much higher than your savings account rate, boosting your savings.

Along with an offset, there a multitude of ways to boost your savings, like super contributions or term deposits.

Refinance

Record-low interest rates and competitive online lenders like loans.com.au, means there has never been a better time to get a home loan.

At loans.com.au, it’s easy to apply for and get approved for a home loan while you’re at home practicing social distancing. We’re still fully operational and our loan specialists are only a chat or a phone call away.

Consider purchasing an investment property

If you’ve been tossing up whether to make an offer and buy an investment property, now might be a good time to get into this game with interest rates at record lows.

Low rates can make starting to make investment repayments easier as you have lower repayments and if you can afford to pay extra you’re building up a buffer if rates do rise.

With the government ban on open houses and auctions, coupled with record-low consumer confidence, the housing market looks set to stall, with some economists predicting prices to drop as much as 20%.

Although this isn’t good news for sellers, it means buyers are presented with a great opportunity, as well as contributing to keeping the property market afloat.

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