How to make money from interest rates at record lows
Whether it’s share dividends or shopping around for cheaper mortgage deals, the current interest rate environment can deliver Australians a financial boost. Here’s how.
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Record low interest rates look like lasting for several years, and Australians who act now can dramatically improve their financial situation.
Whether you’re a borrower or an investor, mortgage rates sitting at 2-4 per cent creates lucrative opportunities.
The Reserve Bank of Australia uses rates as a tool that aims to keep inflation between 2 and 3 per cent, which it believes is just right for economic growth.
Rate cuts are used to stimulate more spending and lift inflation – but we haven’t had 3 per cent inflation since 2014, well before COVID-19 struck, and the official RBA rate at 0.25 per cent is already near zero and tipped to go even lower.
BetaShares chief economist David Bassanese says low inflation is an issue globally.
“The Reserve Bank has said they don’t see a cause to raise interest rates until they seen inflation move back to their target level and unemployment close to four or five per cent,” he says.
Inflation is currently minus-0.3 per cent and unemployment 6.8 per cent.
“COVID has pushed inflation even lower and made it hard to get back to where they want because of this blowout in unemployment,” Bassanese says.
He says now is a great time for borrowers to shop around and potentially “lock in very low fixed mortgage rates”.
Savvy investors who borrow against their home equity can make money on share dividends, which pay more than the cost of borrowing money.
“We have seen dividends cut back, but even after allowing for dividend cuts you are getting attractive yields of almost 4 per cent from the market,” Bassanese says.
“For those who feel they have a secure financial situation and are prepared to weather market volatility, some exposure to shares could be attractive.”
MBA Financial Strategists director Darren James says people borrowing to invest should remember interest rates won’t always be this low, and should have a buffer and exit strategy.
People with mortgages should also factor in higher rates and pay more than the minimum if they can, James says.
“Try to pay as much debt off as possible while it is low,” he says.
Redirecting repayments to higher-interest debts such as credit cards is a wise move, with average credit card interest rates near an eye-watering 20 per cent.
“People want to be paying off their home loan, but they’re better to redirect those repayments to outstanding credit card debts,” James says.
“And be careful. It may be enticing to borrow, but you have to remember you still need to be able to afford it down the track.”