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Make the most of low interest rates

Interest rates are currently low, which is great for borrowers. But when rates are low it can be tempting to overstretch your funds or even dive into a property that may not be good in the long run.

Low interest rates are great for borrowers, but there are some temptations to be wary of. Here we explain some mistakes to avoid and ways to put yourself in good stead with your mortgage.

The Reserve Bank of Australia (RBA) has pushed base interest rates down [1] to their lowest levels ever. But these low interest rates may not be around forever.

On a $300,000 mortgage, every 0.25 percentage cut represents a saving of $750 a year – or $62.50 a month. So the current low-interest focus is obviously great news if you’re a borrower. Still, it is important to remember that savings like these are not the same as free money.

If they aren’t handled wisely, they can lead to bigger and harder-to-manage debts [2] down the track – at a time when interest rates are unlikely to be so friendly.

Don’t give it away

The first rule – and it’s an easy one to break [3] – is don’t just pay more for your property. Low interest rates might mean lower repayments, but it is up to you to ensure you get good value for your purchase.

By all means, invest more in a bigger, better home, but don’t simply bid over your personal reserve during a competitive auction. That will credit all the gain from the lower interest rates to the seller, and leave you with a debt that you may not be able to pay off down the track.

Invest, don’t spend

In the same way, be careful not to blow all the savings on unnecessary spending. There shouldn’t be any need to go without the necessities, and as a prudent borrower, this should also afford you the occasional bonus luxury.

But everything else being equal, the best place for the savings of low interest rates is back on the home loan, or on an income-producing investment. That’s because what goes down will come back up at some stage.

Certainly, interest rates in Australia are at an all-time low, but no one can predict where they will be in five years’ time – let alone towards the end of a 30-year mortgage that is opened today.

Low interest rates are great for borrowers who are looking to get ahead in the property market or want to pay off their mortgage sooner. While it is important to use this time to pay down the mortgage, be sure to keep a chunk of savings (or a redraw facility) on hand in case of emergencies. Always consult a financial adviser to make the most informed decisions about your circumstances.