Australians are enjoying historically low interest rates and there are many signs that this will not change in the near future. There has never been a better time to take stock, look at your current financial situation and wherever possible, make some changes that will help you pay down your debt faster and save you money in the longer term.
Here are our top 5 suggestions on the best ways to take advantage of these record low interest rates:
- Review your current home loan rate and ask if you can get a better deal
- Increase your regular repayments to pay off more capital
- Consolidate your loans
- Use surplus savings to put in an offset account
- Use borrowed funds to invest
Review your rate – get a better deal
The market is incredibly competitive, the big four banks now have a plethora of competitors from smaller lenders, credit unions and a range of digital lenders entering the market. In the past, it felt all too difficult to move all your finances, these days lenders are making it easier than ever to sign up and move your business.
A suggested approach is to shop around, find the best rate and then visit your current lender to see if they can match the rate. Alternatively, speak to a mortgage broker who may be able to assist you with the comparisons. Check the indicative rates shown in our newsletter to see how far off your current mortgage rate is versus what is available on the market. Make sure you are comparing apples with apples – and that you are not sacrificing other positive features of your current loan for a small % reduction. Work out what features of your current loan you want to retain, and then compare the interest rates on similar loans at various lenders.
Increase your regular repayments – move from interest only to principal and interest repayments
With lower interest rates, a greater portion of your regular repayments will go towards reducing the capital component of the loan. This means the loan will be paid off much faster.
If you can afford it, consider increasing your regular repayment amounts while rates are low which will further shorten the lifespan of your loan.
Check the conditions of your loan, if you are paying off an interest only loan, consider increasing your payments to principal and interest. This will help reduce the life of your loan.
Consolidate your loans
In general it makes sense to pay off any ‘bad debt’ first (ie debt that isn’t generating any income – such as credit card, car loan etc). This kind of debt usually comes with a much higher interest rate.
By consolidating these bad debt loans into your home loan, you can save significantly on interest. It also means you will only have to focus on paying down one debt.
Use surplus savings to put in an offset account
If you are fortunate enough to get a bonus at the end of the year, or you receive a lump sum payment for any reason (tax refund, redundancy, inheritance), consider putting it directly into your loan. Every extra bit counts.
If you prefer the idea of keeping these extra amounts for a rainy day, consider an offset account. This allows you to make your savings work for you by reducing your mortgage balance while still having a sense of comfort that you can redraw it if you need it.
Use borrowed funds to invest
With interest rates being very low, it may be worthwhile to consider borrowing money to build an investment portfolio. Often called gearing, this strategy has some advantages:
- You can achieve scale with the addition of the borrowed money
- The interest expense may be tax deductible
- The asset you buy can generate income which can help service the loan
- So long as the asset grows in value, you can achieve a capital gain after paying off the loan
However, using borrowed funds will introduce risks so it’s important to have a plan to manage them. Such as:
- Having a loan serviceability buffer – making sure you have enough surplus income to service the loan, even when interest rates increase by 2%
- Having adequate personal insurance – this is protect you financially should you suffer an injury or illness that prevents you from working
- Having a sound investment strategy – whether its to buy property, shares or a managed fund, you need to ensure the investment makes sense
Get the right advice
It’s important to consider your circumstances and goals before deciding what is the right approach for you. Not everyone can afford extra repayments, but each of these suggestions can help in reducing your debt and moving you closer to financial freedom.
There are a lot of different types of home loans out there that suit different individuals based on their specific circumstances. Low interest rates are only one part of the equation. It can take a bit of research and negotiation to find the best outcome, but the investment in time and the right advice will translate to considerable savings in the long run.
We recommend talking to your Tribel adviser to get the quality advice that will work best for your personal situation and stage of life.