The record low Reserve Bank of Australia (RBA) interest rate has been a hot topic of discussion for mortgage brokers in the Perth area. Standard home loans are a great bargain right now, especially in the Perth market. But did you know that low interest rates provide other great opportunities, too?
All four of the big banks are passing the rate cuts on to their customers. This is great news because it is lowering mortgage repayments, leaving more money for people to stimulate other parts of the economy. Many loans are being processed at 4.5% interest right now, which is down considerably from the average interest rate over the last ten years, 7.21%.
Home loans are the biggest bargain because they are typically the largest loan that a family obtains, but there are plenty of other bargains, too. Here are three of them.
This is probably the best deal out there because so many can take advantage of it. 70% of Australians own their homes. Approximately half of them have mortgages. With today’s lower interest rates, homeowners can choose to pay down their debt faster. There are two strategies here: either make extra payments or have the bank keep your payment stable instead of reducing it for the rate cut.
The second option is great because you are already used to taking the larger number out of your budget each month. Either way, it can create a “buffer” for when rates go up again. We do recommend obtaining a redraw facility. That will allow you to withdraw the extra money you paid if you run into a “rough spot” down the road.
Invest for Neutral to Positive Cash Flow
When interest rates are at a record low, it makes it a lot easier to find a neutral to positive cash flow investment. The lower end of the apartment market is a great place to explore. To “hedge your bets,” it is wise to compute your “neutral” limit at 7.1%, which is the long term interest rate we mentioned above.
Interest rates don’t stay low forever and you need to ensure that you can keep your investment for the long term. If you choose the right properties in the right areas, real estate is as near to a “sure thing” as a long term investment gets.
Buy Your First Home
The most expensive part of a home loan is the first five years. During that time, most of your repayment goes towards interest because the principal is so high. As the principal goes down over time, more of your repayment goes towards the principal. But those first five years can be a bear. With low interest rates, those first years won’t be nearly as bad.
Since money is often an issue for first home buyers, any way to cut the costs of market entry can make the difference between being able to afford a home and not being able to afford it.
Remember, though, that your interest rates will eventually rise to 7.1% or higher. You may want to get a 3-5 year fixed rate home loan for the lowest interest rate you can find.
About that Big Picture
Rate cuts have an effect on the entire economy, not just home loans. We love low interest rates because more people can afford housing, but there is more to it than just home loans. In the big picture, low interest rates mean that the rest of the economy is not doing well and needed a little “bump.”
During the last rate cut, the RBA released a statement detailing why they felt the cut was necessary. They expect a steady economy this year. Unemployment could rise, commodity prices are down and consumer demand is also down.
You will need to take a serious look at your finances to make sure you don’t overextend, but if you have the money, it’s a great time to buy a home.
To learn more, call (08) 9453 8888.