3 things to do when interest rates are low
The cash rate has been kept at 2 per cent for another month, and it doesn’t look like it’s moving any time soon. According to CommSec’s analysis of Reserve Bank Governor Glenn Stevens’ public statements, it doesn’t appear as if the cash rate will change over the next year.
This means that the low interest rate you’ve been enjoying on your home loan is likely to stay for some time. The question is, how do you capitalise on it? Here are a few ways to make the most of your record low interest rate.
1. Fix your rate
This is the most obvious option, but that’s because it’s a solid strategy. In June of this year, the Real Estate Institute of Australia found the proportion of median family income needed to meet loan repayments fell by 0.7 percentage points after the cash rate was lowered. Wouldn’t it be nice to lock in those savings?
If you want to give yourself some wiggle room, it’s also possible to split your home loan: Have one portion of it put on a fixed rate, and another on variable, so you can still take advantage of any future rate movements. Talk to your mortgage broker about the split that will be appropriate for you.
2. Bump up your repayments
A low rate means savings. The question is, what will you put those savings towards? Will you use it to have a little more spending money each month, or do you want to use it to take more off your mortgage. If it’s the latter, you’ll not only save on further interest down the line, but also help insulate yourself from future rate rises.
The Australian Securities and Investments Commission recommends three strategies. You can always simply up your amount by whatever you feel fits, or can afford. For those who don’t need to be as careful with their finances, you can simply round up your repayments to the nearest hundred dollars. You could even pretend your rate is 2 per cent higher and make payments at that rate.
3. Increase their frequency – but open a redraw facility
Rather than simply increasing the value of your repayments, consider simply making more of them. However, if you go for this option, you’ll want to have a redraw facility attached to your mortgage. A redraw facility lets you take back any extra repayments you’ve made in case you need the money.
You’ve got the best of both worlds this way. Not only can you pay down your principal while rates are low, but you will also have flexibility in case emergencies happen. According to a survey by the National Roads and Motorists’ Association, 8 of the 10 of the most common home emergencies are issues that can cost a pretty penny to fix, such as a burst hot water system or a damaged roof. You don’t want to be caught out if it happens to you.
