How record-low interest rates can help you get ahead financially

These strategies can help homeowners get the biggest financial benefit from low interest rates, and secure their future.

Record-low interest rates won’t be here forever, and borrowers are being urged to make the most of them now to get ahead financially.

People with mortgages and equity in their homes are among the best-placed to benefit from debt management and investment strategies amid 2 per cent home loan rates, finance specialists say.

The Reserve Bank has indicated its official interest rate will remain at its current record low of 0.1 per cent until 2024. However, money markets are predicting an earlier rise and lending group Financia’s managing director, Angelo Benedetti, says there are some early warning signs.

“Get in front now because long-term interest rates have already shown indicators they are going up,” he says.

“Commercial rates have gone up, car loan rates have gone up. Now is the time to pay as much as you possibly can, and when rates go up there will be breathing space.”

GET THE BEST DEAL

Make sure you’re getting the lowest possible interest rate on your mortgage. Use comparison websites to check deals, request a lower rate from your lender or consider using a mortgage broker to bargain for you.

Homeowners should use low rates to reduce their mortgage fast. Picture: iStock.

Author and financial adviser Helen Baker says this is the first step in getting ahead financially.

“I used to say if your interest rate didn’t start with a two, you were paying too much,” she says.

“Now there are some below 2 per cent.”

Once you have a lower rate, Baker recommends acting like it hasn’t changed and continuing to pay the same amount.

“So if you were paying $2000 a month at 3 per cent but now pay the same on a 2 per cent loan, you will paying more money off the principal,” she says.

“More off the principal means less interest. So it’s a double win and you pay your home down sooner.”

BORROW TO INVEST

Share dividends and rents from investment properties are higher than interest on investment loans, so consider unlocking your home’s equity to build long-term wealth.

Baker suggests shares or managed funds “so you should be positively geared and you are getting capital growth over time”.

LCI Partners managing director Gerry Incollingo says capital losses on investments can occur “but if you are in the share market long term, it should always come good”.

“As long as what you are investing in achieves better than a 2 per cent return, you are ahead, but you really should sit down with a financial planner and talk through this stuff,” he says.

DEBT STRATEGIES

Incollingo says people with high-interest credit card debt or personal loans can consider using equity in their property to pay it off faster.

“You are ahead from day one,” he says. “The repayments will be a lot less every month.”

Benedetti says when consolidating debts, make the same level of repayments to pay off the loan much faster.

“Instead of paying 6.5 per cent interest you are paying 1.99 per cent,” he says.

“But if you don’t make the same payment you are robbing Peter to pay Paul and it will cost you more in the long term.

“Pay more frequently. If you can pay weekly or fortnightly, that’s the way to go to pay the debt down as quickly as possible, because interest is calculated daily and charged monthly.”

@keanemoney

Author and financial adviser Helen Baker says look for rates below 2 per cent.

SHOULD YOU SWITCH LENDERS?

Moneysmart.gov.au suggests these moves:

• Ask your bank for a better deal. If you have at least 20 per cent equity in your home you have more bargaining power.

• If switching, negotiate a loan with a similar length to your current one.

• Weigh up the cost of lender’s mortgage insurance if you don’t have 20 per cent equity.

• Compare other costs such as average interest rates, fees and charges.

• Make sure that switching will save you money. If it doesn’t, perhaps stay put.