For the last two years, most of the talk around interest rates has been that they will continue to fall. Given that we have seen rates fall to historic lows, many people have a tendency to become somewhat complacent.
Andrew Mirams, a leading finance strategist with over 27 years’ experience in the finance sector who has been recognised by the mortgage industry with a number of awards, shares his top 5 tips to take advantage of low interest rates.
1. Conduct a review of your current home loan deal
With competition so high among lenders it is important not to become complacent and simply make the assumption that you are getting the same great deal as everyone else. Andrew writes that only recently he was speaking with a client who owns a substantial property portfolio and thought that the rate he was on of 4.8% was as good as it gets. “When I told him he was probably about half a percent out of the market and the resulting impact on his portfolio of approximately $3 million dollars meant that he was missing savings of around $15,000 a year, he realised that he needed to review his facilities and consider a change,” says Andrew.
Naturally the savings will be lower for smaller mortgages. But even a saving of $100 a month can make a huge difference to your overall budget. “The banks are actively competing for your business and now is a great time to recast your financial structures – be it for accessing investment funds or reducing your monthly exposure,” says Andrew.
2. Gear repayments as if interest rates were higher
Andrew says it is very wise to gear your repayments at an assumed higher interest rate if at all possible. Why? Well for starters, interest rates aren’t going to stay this low forever. So if you can afford to make higher repayments, it can help to either create a buffer or reduce your home loan liability while increasing the equity in your home.
Andrew suggests gearing your payment at a rate that is 1.5 to 2.5% higher than they are right now.
He gives the following example.
If you currently have a $400,000 home loan at 4.75%, you would be paying about $2,100 a month or $480 a week.
If you make payments at a higher rate of say 6%, these repayments would be around $2,400 a month or $550 a week.
The impact of paying this additional amount of $70 per week is significant – a saving of $94,000 and 7.1 years on a $400,000 loan (based on a term of 30 years).
3. Create an offset account
In simple terms, an offset account sits ‘beside’ your mortgage. Any savings you hold within your offset account becomes a credit against your home loan, which in turn acts to reduce the amount of interest you pay.
Say you have $10,000 in an offset account and a mortgage of $410,000. At 4.75% over 30 years and paying interest only, you will save in excess of $30,000 in interest and cut more than a year off the loan term – just by having money in your offset account.
“The bottom line is, if you don’t have an offset account, you need to get one!” says Andrew.
4. Avoid bad debt
For many of us Christmas is the hardest time of the year to avoid accruing bad debt (money spent on things that don’t generate future wealth), especially credit card debt. But it is so important to try as hard as possible to spend within your means and avoid credit card debt and other high interest credit that will come back to bite you in the new year wen all the bills start rolling in. If willpower is not your strong point, consider getting rid of all credit cards altogether.
“With a little bit of discipline now you’ll be able to buy those things in the future by getting ahead on your home loan,” says Andrew.
5. Consider fixing your rate
Andrew’s final tip is to start thinking about and researching fixed rate options. While interest rates are at an all time low right now, there are still some great opportunities available to lock in your rate for a 3 or 5-year period at well under 5%.
If you’re not comfortable locking in your entire mortgage, most lenders have an option to split your rate, allowing you to lock in a portion of your mortgage at the fixed rate while the remaining portion remains variable.