Whether or not the RBA decides to lower the cash rate this month, it won’t change the fact that current mortgage interest rates are super low. Even in other countries besides Australia they’ve seen similar (or even lower!) rates for many years now.
For those that are old enough to remember a time before sub 3% home loan interest rates you might be asking yourself, how much longer is this all going to last?? Which is a good question as you may be considering locking in a fixed rate or just want to know what’s around the next corner.
The Australian Facts
While I personally don’t have a crystal ball, we can get a very good indication of what the RBA is likely to do simply by listening to what they’ve said recently.
Speaking in Canberra last month Dr Philip Lowe, the RBA governor said that the board was happy to reduce the cash rate further if needed. He also stopped to point out that negative interest rates were “extraordinarily unlikely.”
So it seems that they’re quite happy to go even further down the rabbit whole all things considered. Along with that official statement he also confirmed that they really have no intention of increasing it significantly any time soon.
We will require an extended period of low interest rates to reach full employment and for inflation to be consistent with the target.RBA Governor Dr Philip Lowe
So as a starting point it seems quite likely that interest rates are staying low at least for the foreseeable future in Australia. Around the world though this will obviously depend more on where you live and how your counties economy in general is doing.
Speaking Of The Economy…
So while it’s great news for existing home owners with a mortgage that their interest rate will remain low – or even get lower – there are some other downsides to this scenario.
A low cash rate usually means that the economy and it’s indicating figures aren’t doing so crash hot. Maybe unemployment is too high or businesses just aren’t really investing for some reason. Either way, a reserve bank usually reduces the cash rate in order to stimulate or encourage everyone to borrow more money and use it.
Whether that’s a business expanding their shops and hiring new people or purchasing new equipment or goods to make things more efficient, the result is a stimulated economy as a whole.
Around the world cash rates are pretty much universally at all time lows. Which can be quite bad news if a serious “financial hit” occurs as it doesn’t leave the reserve bank with much to do. While most reserve banks have multiple things they can do to kick the countries economy back into life, plunging the cash rate is an old time favourite.
However when you’re already at sub 1% cash rates, there’s not really anywhere left to go! It’s even worse over in Europe with many countries already in the negative cash rate zones!
How Can You Take Advantage?
Here at MTM though we don’t typically focus on high level mumbo jumbo stuff like a countries negative interest rate policy as it’s not something you personally can control.
I’m a very big proponent of only truly caring and focusing on things that you can control like how much money you’re slamming into your mortgage each fortnight. So as an indebted person trying to cut down a loan as fast as possible is there anything you can do to really make the best of this situation?
Yes. There’s two main things you can and should be doing.
The first is, unsurprisingly, shoving as much money as you can towards those extra mortgage repayments. If paying off a mortgage is like trying to run with a 25 kg ball and chain around both legs, having such stupidly low home loan rates is akin to only running with the chain!
If you were paying off a $400,000 loan and the interest rate was say, 7% which was quite a reasonable rate in the 2000’s, you’d be slugged with $28,000 in interest per year. Compare that to a current home loan interest rate you can get from UBank of 2.84% p.a.which has you only paying $11,360 per year.
So your 28 kg ball and chain is now only an 11 kg one. As a result you can and should be running much faster towards that finish line!
The second thing you can do is keep an eye on your interest rate and shop around quick smart if your bank is being lame when it comes to passing on the full cash rate cuts.
Just like a union and a business will fight each other over wages so should you and the bank. They want to keep rates high and will use any BS excuse they can find to do so. You want them as low as possible so use the main power you have, your ability to walk.
Learn how to negotiate and save yourself thousands!
Read the Guide!
Banks do detailed costs and estimates on how much they stand to make/lose when it comes to their customers. So you walking out before that pay back period of theirs is up really isn’t something they want. There’s also a lot of other reasons to switch banks especially if you’re with a major one as we looked into before.
So keep an eye on your mortgage and pay even more attention when there’s one, two or more rate cuts going through month after month. There’s absolutely no reason to not be getting the very lowest rates available assuming you have a decent amount of equity built up and your LVR is looking healthy.
If you want you can also figure out how big or small your own personal ball and chain is. Simply take your loan size and multiply it by your current home loan interest rate.
For example a $400,000 loan at 3% is $400,000 x 0.03 = a $12,000 per year ball and chain! Post yours in the comments below and the one with the smallest one wins! (obviously people who don’t have mortgages anymore aren’t counted).
The benefits include: 1) How to pay off your mortgage faster than 99% of people with one hour a month of work 2) How to get rid of your debt and have the freedom to spend money on the things you love, guilt free 3) Clear outline of how to setup your expenses, mortgage and general finance 4) How offset accounts work and how to get the same result without being gouged by the big banks 5) How to cut through the crap and focus on the things that truly matter when taking down a mortgage 6) How to adjust the strategy so it works for you, even if you have kids, even if you only have one income 7) How to do all of these things and maintain a normal social life (and never be cheap).