Don't let low interest rates rush decision to buy a home

THE decision last week by the Reserve Bank to keep the official cash rate on hold was good news.

THE decision last week by the Reserve Bank to keep the official cash rate on hold was good news.

Sure, those of us with a home loan would have preferred a rate cut, but it was certainly way more welcome than a rate rise - especially as our household debt levels are soaring.

A recent report from AMP and University of Canberra-based think tank NATSEM shows Australian households owe an average of $245,000 - four times the average household debt of $60,000 in 1989.

It means that in less than 30 years we have quadrupled our debt burden.

Putting this in perspective, the report - tellingly titled Buy now, pay later - points out household debt has grown by 5.3% above the rate of inflation, leaving our income growth rate of 1.3% trailing in its wake.

Looked at differently, in the late 1980s the average household could have paid off its debt with the after-tax income from eight months. These days it would take 22 months.

Rising house prices and low interest rates have fuelled our willingness to take on more debt. To be fair, the bulk of household debt typically relates to home loans, and your home is an asset that should grow in value over time.

Indeed, home ownership has helped generate wealth for many as the value of their homes and investment properties has skyrocketed.

Nonetheless, carrying large amounts of debt means paying solid interest charges - money you could be investing elsewhere.

That's why it pays to have a long-term plan to pay down debt.

Making extra repayments on your loan is a simple way to clear the balance sooner and save a bundle.

While the balance of our credit cards may pale into comparison with our home loans, putting purchases on the plastic is an easy way to lose track of where your money is going. It can also mean copping the full brunt of high card interest rates.

Aim to use a debit card when you're out shopping. It's a simple way to live within your means rather than building yet more debt.

*Paul Clitheroe is a founding director of financial planning firm ipac, chairman of the Australian Government Financial Literacy Board and chief commentator for Money Magazine.

Originally published as Don't let low interest rates rush decision to buy a home