A month on from the historic reduction of the cash rate to 2.25 percent, and the Reserve Bank of Australia (RBA) appears content with its move. Meeting on March 3, the RBA board decided — despite some predictions — to keep the cash rate as is for another month.
This ought to get any Australian with a home loan and other types of debt thinking: With interest rates at never-before-seen lows, what can I do to take advantage of this situation?
It’s not just a question for today. In his statement, Glenn Stevens, RBA Governor, suggested that more rate cuts could be on the table in the months ahead. So why not get planning now to better capitalise on this trend in the future?
1. Pay down your principal
According to Tim Lawless, CoreLogic RP Data’s Head of Research, last month’s cash rate cut brought the average standard variable home loan rate to 5.7 percent, and the average discounted rate to 4.85 percent – the lowest mortgage rates since John Gorton was Prime Minister!
While you’re paying less interest on your home loan than you ever have before, rather than pocketing the change, put those savings toward making extra repayments on your principal. In fact, if you’re making interest-based savings on any other products, such as variable purchase rate credit cards, channel them to this purpose as well.
2. Fix your mortgage
Just to be clear, we don’t mean mend your mortgage — there’s probably nothing objectively wrong with it. But with interest rates possibly lower than they were when you first carried out a home loan comparison, now might be the time to refinance and fix the rate.
You’ve got a couple of ways to do this. You could fix the entire loan for the same low rate, ensuring that you pay less interest on your entire loan. Remember though, with a fixed rate you likely won’t be able to make added repayments.
Alternatively, you could go for a split home loan structure. This way, you shield a big chunk of your loan from rate rises by fixing it, while putting the other part on a variable rate, giving you the flexibility to make extra repayments to your heart’s desire.
3. Make a stash
When the RBA made its previous cut, Joe Hockey, Treasurer of the commonwealth government, praised it for giving an Australian family with a mortgage of $300,000 around $750 extra a year. Given that CoreLogic RP Data measured the median house price of the combined capitals at $525,000 for February(with some capitals well over this number), plenty of Australians should have a lot more to play with.
Avoid the temptation to spend this bonus on a new TV. Instead, consider putting it into a high interest savings account — by the time it matures, you could have a handy cash infusion for any number of purposes:
- Putting toward a home deposit
- Saving it for a rainy day fund
- Paying down one of your loans
4. A super bonus for your super
Instead of putting the bonus sum into a saving’s account, you could also just as well put it toward your superannuation. In a sense, your super is one big savings account devoted entirely to your retirement.
Whether you’re running an SMSF (self managed super fund) or are a member of an industry fund, you can make extra contributions to your super any time. These will be counted as ‘after tax’ contributions, and won’t be taxed when going into the fund — by coming out of your personal money, they will already technically have come under the tax man’s knife.
5. Give it away now
The savings you make from interest rate cuts don’t necessarily have to solely benefit you. You can also take a more altruistic approach and make a donation to:
- A charity or cause you’re passionate about
- Your former school or university
- An organisation whose work or products you support
Of course, there’s something in it for you, too: You can claim a tax deduction on the donation or gift you make. Just be aware that the recipient must be considered a deductible gift recipient (DGR) by the Australian Tax Office. The Australian Business Register has a list of DGRs on its website.