Low rates mask potential home loan danger

1st of July 2014 | by Laine Gordon

Record low interest rates, combined with booming house prices, have put many home owners in a ‘perceived’ better financial position this year, according to Australia’s leading financial comparison website, RateCity (www.ratecity.com.au).

And today’s decision by the Reserve Bank of Australia (RBA) to leave interest rates steady, signals more good news for variable borrowers. The cash rate remains on hold at 2.5 percent for the 10th consecutive meeting – 11 months since a rate cut and more than three and a half years since the last rate hike.

Alex Parsons, CEO of RateCity.com.au, said, “One great thing about record low interest rates is that people are getting a better handle on the debt that they have.”

Recent RBA research revealed that the ratio of household debt to household assets has improved. But meanwhile, household debt in comparison to household disposable income is moving in the wrong direction, Parsons said.

“While it’s all well and good for the asset value to be rising, it’s the ability for Australian consumers to be able to pay back their home loan that is important,” he said.

“The ratio of household debt to household disposable income has been going in the wrong direction in the last 12 months on average.

“What that means is that it’s harder for Australian borrowers to be paying back their home loans and that’s where it really hits in the hip pocket for ordinary everyday Australians. This looks set to worsen with the impact of the Federal Budget.”

Parsons urged consumers to try to pay down their debts as much as possible and really take advantage of the low-interest-rate environment while it lasts.   

“My number one tip is to get a handle on your debt as quickly as possible, and pay off as much as you can while interest rates are at these low points,” he said.

“If you’re able to afford just over $3 a day extra – the cost of a takeaway coffee for most people – that’s $100 a month so on the average mortgage of $300,000 over 30 years and could save you $40,000 off the cost of that home loan. Where else could you make those types of savings with such little impact?”

“Historically rates have been much higher – at around 7 percent, on average. So don’t max yourself out today because over time I believe interest rates will go back up,” he said.

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