How to Take Advantage of Rock-Bottom Low Interest Rates

Here’s how homeowners, current and prospective, can make the most of low interest rates!

Are low interest rates here to stay? It appears they are, at least for the next few years.

The cash rate set by the RBA has now been at 0.1% for 12 months, and there is no appetite for imminent change. In his most recent statement, Governor Phillip Lowe confirmed that “The Board will not increase the cash rate until actual inflation is sustainably within the 2 to 3 per cent target range. The central scenario for the economy is that this condition will not be met before 2024.”

What does this mean for borrowers? Don’t get complacent, but do take advantage of the current environment to improve your financial situation.

How you do so depends on whether you’re planning to buy your first home or are already a home owner.

Prospective home owners

If you haven’t yet taken out a home loan, you’ll need to make a decision on whether to choose a fixed rate, variable rate or split loan option.

The RBA have signalled previously that they are very unlikely to take interest rates into negative territory, as has been seen overseas. That leaves two scenarios for the future: interest rates will stay as they are, or they will rise. On that basis, a fixed rate loan can be a wise choice. This allows you to fix your interest rate at very low levels, giving you certainty even if rates rise. Currently, fixed rate loans are available from as little as 1.69% if you meet certain criteria.

Lower interest rates may also improve your serviceability (the amount you can comfortably repay per month). That’s reflected in the size of new home loans, which have increased from an  average $496,860 in July 2020 to $571,992 in July 2021. However, if you can afford to it’s still a good idea to build in a buffer. Make sure that you can still meet your repayments if rates rise by a couple of percentage points.

Existing home owners

For those who have had a mortgage for at least 18 months, now is the time to look into refinancing. It’s a sad truth that lenders don’t value loyalty. Banks will extend various incentives to get you to switch to their institution, but won’t give the same perks to existing customers.

Those incentives might include:

• Cash back offers, with lump sums of $3,000 or even more payable to borrowers to switch. You can check the current cash back offers here.
• Honeymoon rates, where borrowers can enjoy a discounted interest rate for a set period (usually between 6 months and 2 years) before reverting to a standard rate.
• Lower ongoing rates than your current lender is willing to offer.

One caveat applies: If your circumstances have changed for the worse since you took out the loan — perhaps you’ve dropped from a double income household to just one, or switched to a less traditional form of employment — you may not be able to get a new offer. In this case, it’s still worth giving your current lender a call and asking if they can reduce your interest rate. If you’re on an older rate that is now above market standard, most banks will reduce it slightly on the spot.

All mortgage holders

Whether you’re the proud owner of a brand new house and a brand new home loan, or several years into paying off an existing loan, one piece of advice still applies. There’s never been a better time to try and pay it down.

If rates rose to 4% or even 5%, would you still be able to meet your repayments? If so, why not overpay now? If you can pay extra into your mortgage while money is cheap, you can get ahead of the game. When interest rates finally do rise, the higher interest will be calculated on a lower balance. That will cushion the blow.

Some ways to pay down your mortgage include:

• Sending ‘windfall gains’ like a tax return, end of year bonus or compensation payment straight to the mortgage balance
• Rounding up your payment. If you’re currently paying $2,317 a month, round it up to $2,350 or even $2,400 and set your direct debit accordingly. It’s a little extra out of your salary, but it can make a huge difference over the longer term.
• Avoiding lifestyle creep. Got a recent pay rise? Send the extra straight to the mortgage and pretend it never happened.

Bear in mind that fixed rate loans won’t let you make extra payments without penalty. If you do have the capacity to pay extra, consider taking out a variable loan, or a split loan with a variable component. You can overpay on that portion of the loan while enjoying the ultra-low interest rates on the fixed portion.