Taking advantage of low interest rates

The Reserve Bank has made its first decision of the year on interest rates. The 2.5% cash rate will remain, and according to the RBA Governor Glenn Stevens, our economy is suited to low interest rates for the time being.

Retirees and pre-retirees who prefer low-risk cash investments may have to look at higher yielding investments this year given that cash is earning them around 1% over inflation.

But those in the wealth-building phase have a chance to use the low rates to their advantage. Lower interest rates reduce the overall cost of capital, they allow you to accelerate debt repayment, meaning you can build equity and wealth faster.

The current interest rate environment has increased competition among lenders. So if you’re seeking a new mortgage, do not simply sign up with your current bank or building society.

Look around and use the comparison websites because you’ll see at least a 1% gap between the most expensive and most affordable home loans – a noticeable difference once you’re repaying the loan.

Also, when you get down to a short list of lenders, insist on knowing their ‘comparison rate’. This is a legal formula which gives you the true cost of a loan and allows you to compare apples with apples. And understand that a loan promising a ‘discount’ on an interest rate falls outside the comparison rate law. It could mean anything.

With low interest rates forcing competition among lenders, price is not the only factor: you might be able to get a mortgage with flexibility and options at the price of a ‘basic’ home loan. But you must ask.

And what about refinancing? If you have a mortgage you’ll be targeted by many organisations wanting you to refinance with them, and my advice is to get the loan offer in writing and then work out if all the pluses and minuses make it worth shifting. This is a decision you have to understand yourself and there’s no substitute for a pen, pad and a calculator.

And remember that refinancing doesn’t stop with mortgages: you can fold credit card debt and personal loans into your low-cost mortgage and be paying much less for the debt.

Finally, what to do with fixed versus variable?

It’s tempting to lock-in a mortgage at a low rate for three years. Some people like the certainty, and you can save money if variable interest rates rise above your fixed rate. But the banks don’t offer three-year fixed loans so close to their variable mortgage rates if they think the cash rate will rise soon. And don’t forget that most fixed-rate mortgages lack the flexibility to make extra repayments, thus removing an option to pay less interest.

Low interest rates are fantastic for home buyers and mortgage holders; but you must think through what the advantages are to you. Then you need a plan and then you have to act. 

Mark Bouris is executive chairman of Yellow Brick Road, a financial services company offering home loans, financial planning, accounting and tax, and insurance.