Why you shouldn't be seduced by low rates

Australia’s official cash rate is at a 53-year historical low of 2.5 percent, a far cry from the all-time high of 17.90 percent in January 1990. With home loans starting at 4.29 percent fixed rate for one year, an increasing number of buyers are entering the market, drawn by the prospect of relatively low repayments.

While interest rates are attractively low at the moment and therefore tempting to borrow more when buying a home, it is important to remember that a mortgage is a long-term commitment and rates can rise.

“This cycle happens all the time and you have to remember that interest rates will go back up,” says Deborah Kent, owner of Integra Financial Services and NSW State Director of the Association of Financial Advisers.

Plan for future rates

“To ensure you can afford the repayments when rates are higher, you need to do your budgeting based not on where the rates are today but where we think they might get to, which is about 8 percent,” Kent adds.

In addition to calculating how much you can afford to repay when rates rise, Kent advises prospective buyers to save a higher deposit and look at cheaper suburbs if their chosen location will push them beyond their limit.

Use calculators sensibly

Online calculators that help you work out how much you can borrow are a handy tool, but their calculations are based on current interest rates. Once again, Kent advises entering an 8 percent rate to determine how much your repayments could rise to before committing to a mortgage.

“It really comes down to what you can repay,” she says. “My tip is to put in the amount you are thinking of borrowing to see what the repayments will be at today’s rate and at 8 percent.”

Use the opportunity to pay down debt

Whether you already have a mortgage or are about to buy your first home, low interest rates are a great opportunity to get ahead on your home loan repayments. Paying more than the minimum will help you pay off your mortgage faster because the extra repayments are going towards the principal of the loan rather than the interest, and it also means you won’t notice the impact when rates do go up.

Kent further advises turning your attention to other debt. “Take advantage of the excess cash flow to reduce other debt, especially credit card debt,” she says.

“If you have a lot of credit card debt, consolidate it into your mortgage and pay it off at a lower interest rate. With most credit card accounts charging interest between 18 and 20 percent, dropping to 4.9 percent can make a big difference.”

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