Use interest rate savings constructively

With the interest rate down to the lowest level in fifty years, it offers an unprecedented opportunity to invest in your own home or bring your debt down, says Samuel Seeff, chairman, the Seeff Property Group. He gives seven tips for households to leverage the historically low interest rate to their advantage.

1 Reduce your mortgage balance

If you already have a property with a mortgage loan, you can keep your payments at the original level and use the difference to pay your loan off faster. This will also create a financial buffer to enable you to absorb any future interest rate hikes as you will be used to paying the higher amount.

2 Swop your rental for your own home

The lower interest rate means that in some areas it’s now almost cheaper to buy than to rent, or there will be very little difference. If you qualify for a mortgage loan, then now is an excellent time to buy. Since the repayments on mortgage loans have come down, your earnings required to qualify will also be lower.

3 Buy a new house

If you are thinking about trading up, this could be an opportune time to do so as you can benefit from the interest rate saving, which could make the repayment on the new property almost the same as on your current home.

4 Build a cash reserve

If you’re financially secure, you can keep your mortgage payment at the old rate, and invest the difference between the old and the new rate into a savings account. If you are renting and your monthly rent is reduced thanks to the lower interest rate, you can tuck away the savings into your housing deposit account or use it to pay off other debt.

5 Reduce your car debt

There’s a big advantage to owning your car and by keeping your car repayments at the original amount, the difference could go towards reducing your car debt. It could also create a buffer against future interest rate hikes. If you’re thinking about trading up, a paid off car will come in handy as a deposit on the new car.

6 Reduce debt on credit cards, short-term loans and store cards

Since this type of debt carries a higher interest rate, typically twice the prime rate and more, you should always aim to pay it off as quickly as possible. If you don’t need the savings this puts back into your budget, keep your repayments at the original level so that you can reduce the debt faster.

7 Take a short-term loan to expand a business

If you have a small business or are thinking of starting a business, now could be a good time to take advantage of the cheaper borrowing costs. You should, however, ensure you’re financially secure and plan for future interest rate hikes.