Interest Rate Considerations

In the late 80s interest rates peaked at 17% which made home ownership out of reach for most people and hard to cover for those that had them. We move forward to today and the Reserve Bank Cash Rate is at a very low 2.25% with the last rate rise occurring in November 2010.

While this isn’t great news if you’re thinking of investing into bank deposits or fixed interest investments as returns are low, it does open up opportunity for people to review their mortgage, other debts and financial planning affairs in general.

Some of the main considerations could be:

–   Obtaining a low rate mortgage that still provides the benefits that you need or utilise. If you refinance to the lowest rate loan you could end up paying a higher interest rate on your credit card and may not be an appropriate strategy or beneficial for you

 
–   There are lenders outside the major 4 banks. While many of us complain about the big 4 making massive profits, we also like their security. You can consider options outside the banks and look at credit unions, lending societies, and other lending institutions.

 
–   Reducing your mortgage interest rate and continuing to make the same level of repayments could see you reducing the length of your loan which means interest savings. But, are there restrictions on how much you can make in additional payments? Do you have a redraw facility in case you need to access the funds?

 
–   Credit card interest rates are high and can be up to 20% so consolidating debt may be a way to go, especially if you can reduce that down to say a mortgage rate of around 5%. But beware because if you don’t make additional payments to cover the consolidated funds, you are extending the term of this debt and could end up paying higher interest over the life of the debt.

 
–   Margin lending becomes more appealing with lower interest rates however any strategy that includes debt, should also have contingency plans. Can you still afford it if interest rates increased by as much as 3%? Do you have relevant insurances in place to ensure that can cover your obligations if you can’t work?

 
–   Returns on cash and fixed interest investments become lower and shares become more appealing however you need to consider the risks involved. Chasing returns rather than investing into a diversified portfolio could see a decline in your balance outside what you are comfortable with.

 
–   Be careful with your spending, with additional funds in our pocket due to lower interest rates, it is tempting to spend more. Maybe consider making additional repayments of debt, additional savings or additional super contributions to ensure that the additional money available in your cashflow isn’t blown.

While you may think that you’re personal situation hasn’t changed, the world around you is. Interest rate rise and fall, economic markets changes and legislation is amended, which is why you should be regularly reviewing your financial position. If you haven’t had a review of your financial plan lately, make sure you give the team at JBS a call to make an appointment.