Record low interest rates: what do they mean for you?

On Tuesday October 1, the Reserve Bank cut the Cash Rate to a record-low 0.75%, meaning the rate has been halved in just four months. This unprecedented move has the potential to further drive down consumer interest rates, which are already lower than ever.

If you have a home loan or a few dollars in the bank, this change could well impact you and your wealth creation and management strategies.

LOWER BORROWING COSTS

For most Australians, the largest cost of property ownership is mortgage interest. In fact, if you bought the average Australian home with a 30-year loan term at a 3% interest rate, you’d end up paying over $220,000 by the time you’d settled your mortgage.

This latest interest rate drop and the current low-rate environment combined mean that a smaller proportion of your repayments go towards interest. That could mean lower repayments or, even better that you could pay off your loan’s principal faster, and in the process save thousands of dollars.

Most consumers go for the lower repayment option, but in the long run paying your loan off faster will put you in a far better financial position.

LESS RETURN ON YOUR SAVINGS

There’s a flipside to low interest rates. Interest returns on savings accounts and term deposits with your bank may decrease. At the moment they’re already very low, averaging at around 1.9 per cent.

Before you go for the easy option and save your money with your bank, consider other options like super, shares or even property. These investments may come with a higher risk but also often provide a far higher return, in effect making your money work for you. But, as always, before you make any decisions around your investments or savings, make sure you seek financial advice from a registered professional.

A CHANGING ECONOMY

Australia’s economy is stagnating, with GDP growth expected to slow to 2.5% next year and unemployment to hold steady at over 5%. This is part of the reason for the rate cut – in the short term, lower interest rates boost consumer spending, which in turn provides a shot in the arm for the economy.

The Reserve Bank of Australia’s rate cut reflects the actions of several central banks around the world, including the American Federal Reserve, who recently cut their benchmark rate in reaction to slowing global economic growth.

In the near future, we could also see announcements of new spending from the government to boost the economy in response to slow economic conditions. These could include increased funding for public housing and infrastructure or even further tax cuts.

A CHANCE TO REFINANCE

If you haven’t checked your home loan’s interest rate or if you’ve been fixed for several years, now is the perfect time to assess your options. Just five years ago, the average rate was as much as 5% higher than current rates, so you could save thousands of dollars.

Speak to a mortgage broker or your preferred lender sooner rather than later for some top deals.

The other hot tip is to check out Homes Finance, a marketplace where brokers put forward their best deal to help you find terms that are the right fit for you. Check it out and you might be pleasantly surprised.

* The information provided or any opinions expressed in this article are of a general nature only and should not be construed or relied on as a recommendation to invest in a financial product or class of financial products. You should seek financial advice specific to your circumstances from an Authorised Financial Adviser before making any financial decisions.