How to profit from ultra-low rates

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 investor, mortgage rates sitting at 2-4 per cent create lucrative opportunities.

The Reserve Bank of Australia uses rates as a tool 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 near zero.

BetaShares chief economist David Bassanese says low inflation is an issue globally. “The Reserve 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 4 or 5per 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 the 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.

MBA Financial Strategists’ director Darren James, right, says people borrowing to invest should remember interest rates won’t always be this low, so have a buffer and exit strategy.

People with mortgages should also factor in higher rates and pay more than the minimum where possible, James says.

“Try to pay as much debt off as possible while it is low,” he says.

Redirecting repayments to higherinterest debts such as credit cards is also a wise move.