Use low rates to bust up your debt, experts urge
IT’S had a great run, but I’m not surprised that experts are now vigorously reminding homeowners that the period of low interest rates won’t last forever.
The fear seems to be that borrowers won’t use this time to do what’s best for their mortgage - that is, to pay down debt while charges are low.
The call to “make hay while the sun shines” comes despite experts seriously contemplating the likelihood of the next interest rate move being down rather than up, as earlier predicted.
The Reserve Bank of Australia has held its cash rate target at 2.5 per cent since August 2013, sparking a chain reaction of competitive low rates among both big banks and smaller lenders.
Peter Arnold of comparison site Ratecity.com.au said the RBA’s lack of movement had caused a trend of “lower for longer” among lenders.
He said the dominant thinking was that “a cash rate hike may still be a way off, combining with chatter about an increased likelihood that the next move is down”.
But he cautioned borrowers against being lulled into a false sense of security.
“Most rates remain at historic lows, and, while they may go lower still, we expect that rates will ultimately rise. I’d urge consumers to use this low-rate environment to make inroads and get ahead on paying down debts.” Consumers have been spoilt for choice of late given the array of interest rates on offer across all categories, including home loans.
“While in the previous quarter the majority of rate movements were led by the majors, this past quarter saw most of the activity from smaller players.”
Variable rates had continued their gradual slide but it was fixed rates that saw the largest cuts, Mr Arnold said.
“Fixed rates remain the biggest movers again this quarter, with most activity from the non-major banks, which have continued to push rates lower in the home loan space.”
Money expert Michelle Hutchinson of comparison site Finder.com.au urged borrowers to shop around for the best rates, given a mortgage of $489,300 could blow out to $1 million in costs over the life of a 30-year loan at 5.5 per cent variable interest rate.
“While it’s likely that your home will increase in value over a 30-year loan term, it might not compensate the cost of a home loan as the money you end up spending can be greatly increased if you have a small deposit and don’t shop around for a good value deal,” she said.
Ms Hutchinson said borrowers should take advantage of online tools to compare different home loan products.
The latest ANZ/Property Council Survey found a positive outlook for the housing market in 2015.
The next Reserve Bank board meeting to decide whether to move the cash rate is on February 3, with the result made known at 3.30pm Brisbane time.
Experts are urging Australian families to use the current low interest rate environment to pay down big chunks of their home loan debt before the Reserve Bank of Australia (below) considers taking its cash rate target higher.