Written by Hudson Adviser Ivan Fletcher
Interest rates have never been lower, and it’s possible they might fall even further. This creates opportunities for householders and businesses, so how can you best take advantage of low interest rates?
1. Pay off your debt more quickly
By maintaining constant repayments as interest rates fall, you’ll reduce the time it takes to pay off your loan. That’s because interest will make up less of each repayment, with more going to reduce the outstanding capital. And the great thing is that to take advantage of this strategy you don’t need to do anything. Lenders usually maintain repayments after each drop in interest rates unless you instruct them otherwise. Avoid the temptation to reduce your minimum payment as interest rates fall (unless you are in cash flow crisis of course).
2. Refinance your home loan or Investment Loan
Lenders vary in the extent to which they pass on cuts in official interest rates. This is something Hudson have seen a lot more of in the last 6 to 12 months. Depending on the target market of the finance lender at the time, we have seen some institutions pass on bigger rate cuts for home buyers whilst other lenders have provided bigger rate cuts to investors.
Fixing rates can present a viable alternative. My caution to anybody fixing rates is that in the last 20 years, at least 90% of the time, the bank ends up the winner. For me the argument for fixing is tied more to the need for certainty or putting a maximum on your repayments (eg when household income is going to drop temporarily).
Beware of your existing Lender’s Fixed Rate Offer - If looking at Fixed versus variable it is very important to look across multiple banks. Too many times we have seen Hudson members lock in a fixed rate because it was presented to be just as good as the variable rate (completely unware that there was significantly better variable rate on offer elsewhere).
So if you want the best deal in the current circumstances it is worth at least doing a rate comparison on your existing loans to see what is currently available. This is something your Hudson Adviser can help you with. If you haven’t had a Loan review in the last 3 years, chances are the great deal you were previously on is no longer the best available. Give your Hudson adviser a call.
3. Buy a first home – or upgrade
Low interest rates create opportunities for first homebuyers to get a toehold in the property market, and for existing homeowners to upgrade to a bigger home, better location or proceed with that perfect renovation. While lower interest rates can be a bit of a two-edged sword, as they tend to drive up property prices, most people are happier borrowing in a low rate environment rather than when rates are high.
4. Borrow to invest
While Australians love to invest in property, borrowing to invest in shares is also a viable wealth creation strategy. Often referred to as gearing, the key to successfully investing borrowed funds is that the total returns must exceed the total costs. As the most significant cost is usually the interest on the loan, low rates make this strategy more attractive.
Take care, however. Gearing can magnify investment returns, but it can also increase your losses. It’s therefore important that you fully understand investment risk and how to minimise it.
The first step in considering such a strategy is to identify and quantify a whether you have a surplus in your monthly cash flow. From there you can discuss the pros and cons of property versus equities with your adviser.
5. Expand your business
The whole point of a reduction in interest rates is to stimulate the economy, and that includes encouraging business owners to invest in their enterprises. Low interest rates make it cheaper to borrow to buy equipment to increase productivity, to take on more staff, or buy out a competitor and generally expand the business.
Some of these strategies are simple ‘no-brainers’. Others involve significant levels of risk. To take a closer look at how you can make the most of low interest rates, talk to your financial adviser.