This may be the best time to borrow – ever

You’ve probably heard by now that interest rates are pretty low at the moment. In fact, low is an understatement. They are potentially at rock bottom.

I am seeing a number of lenders offering advertised fixed rates in the low 2s (comparison rate in the mid 2s). There are also many variable rate options in the low 2s.

Why is now a good time to borrow?

Given the cost of borrowing is so cheap right now, you currently have a better chance than usual of widening this gap. The savings you make from lower rates go into your pocket.

Even if you aren’t buying an investment, lower interest rates can significantly reduce your ongoing loan expenses, reduce the amount of interest you pay overall, and could even help you to pay off your loan more quickly if it means you have more cash available to make additional repayments.

Practical ways low interest rates can help

To demonstrate what happens when you pay a lower rate, let’s do some quick calculations.

  1. Lower expenses

On a $400,000 loan at 3.3% interest, you would pay a total of $187,954 in interest over a 25-year loan term.

However, if you could get a fixed rate of 1.89% for two years, and then move to a variable rate of, say, 2.5% thereafter, you would only pay a total of $132,965 in interest, a saving of $54,988 over 25 years compared to the other loan.[1]

  1. Reduce the term of your loan

Lower interest expenses can also free up some cash and allow you to make extra repayments on your loan. This means you will pay down your principal more quickly. The beauty of this is that it reduces your interest repayments further, since the interest you owe is calculated on the amount of principal you have remaining. In addition, it gives you a buffer if interest rates rise in the future.

As an example, if you put in an extra $300 per month, you would pay off your loan almost five years earlier, and save $27,810 in interest over the 25-year period.[2]

  1. Get a bigger loan

When you first apply to take out a loan, the lender determines how much you can borrow, primarily based on how much money you have (either in cash or in equity) and your ability to make your repayments (also called serviceability). Lower interest rate expenses typically mean your ability to service the loan increases, which may allow you to take out a bigger loan. This may be beneficial if you want to buy a more expensive home, or if you want greater leverage on your investment purchase. Remember that the greater the leverage, the greater the risk, so consider consulting a financial adviser.

How to take advantage of this low-rate environment?

If you are thinking about taking out a new loan or changing your existing loan, the best way to get a competitive deal is to go through an experienced mortgage broker like me. I have over 30 years’ experience in the industry and I work with a large panel of lenders offering a variety of loans. I will talk with you about your immediate and long-term goals, the pros and cons of different types of loans and loan features, and together we can work out what kind of loan and lender would suit you best.

Similarly, if you already have a loan but don’t feel you are getting a competitive rate, I may be able to help you refinance with a more suitable loan.

There is no cost to you for my service. At the end of the day, I help my clients build wealth through borrowing the right way, and I would love to help you on this journey.

 

[1] Calculations based on a $400,000 principal and interest (P&I) loan on a 25-year loan term with no other fees or charges. To make these calculations, we have used the smartline calculator.

[2] Calculations based on a $400,000 Principal and Interest (P&I) loan on a 25 year loan term at an interest rate of 2.5% with no other fees or charges. To make these calculations, we have used the smartline calculator.