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How to Make the Most of Historically Low Interest Rates

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Reserve Bank interest rates are incredibly low right now. In fact, at 2.25 per cent, it’s a historic low – the official cost of borrowing remains at its lowest rate since the Reserve Bank of Australia (RBA) gained independence from the government in the 1990s. There are even suggestions that the interest rate may be cut again in the near future. This has some obvious impacts on home buyers, both those already in the market, and those looking to get into it.

At the most basic level, the lower interest rate means finance comes cheaper, and home buyers can purchase homes for less. It’s not an insignificant amount, either. According to Domain, if you take the average home loan of just shy of $310,000 in Victoria, for example, the typical homeowner will save around $47 per month, or $564 per year. The savings will grow the more expensive the home being financed, so NSW residents, who take an average loan of around $316,000, will save a little more. And anyone that owns a property above the average cost will, naturally, save even more.

Cheaper loans are, on the one hand, a benefit for buyers. First home buyers will have more confidence in being able to make repayments, while existing property owners might be inspired into purchasing a second or third property, as the gap between the mortgage and the rental payments will be smaller.

For people with existing mortgages and variable interest rates, the lower rates present an opportunity to pay down the home loan more quickly. Investing that extra $564 into the home loan helps lower the debt while interest rates remain low, and, if you organise a redraw facility with your bank, you’re able to then use that money in the event of an emergency without needing to take on additional debt.

But this will in turn create competition, which may have the effect of pushing up property prices. When that happens, renters will also find their costs of living rising, which will have an adverse effect on their ability to purchase property. With the property market already stimulated from the sustained period of low interest rates, home prices were already experiencing a spike of activity with the strongest raise in prices in six months at the start of the year, and building approvals are at record highs at the moment.

The economic climate for borrowing will not remain good forever. With interest rates being at historic lows, they might remain there for a while, or even go a little lower, but ultimately they will start rising again, and home buyers should consider carefully whether they are in the financial position to absorb increases in an interest rate of two per cent higher, even as they enjoy the benefits of the low interest rate now. The general consensus is that you should ensure that you’re able to repay a long term interest rate of 7.21%, to ensure that you’re able to cover the cost as interest rates inevitably start climbing again.