Record low rates could mean record high debt reduction
The Reserve Bank of Australia, the RBA, is the central bank of Australia. It has the responsibility of managing the Australian economy and aims to positively contribute to the economic prosperity and wealth of Australia and its residents.
Within this role it issues Australian currency, maintains stability of the financial system as a whole and sets the official interest rates between banks, greatly influencing residential mortgage rates available to you.
Since 2012 Australia has experienced a protracted and steady decline in the official interest rate, or “cash rate”, which is set during an official Reserve Bank of Australia board meeting on the first Tuesday of every month. At their monthly monetary policy meeting on the 3rd of November 2020 that the RBA set the official interest rate at an historical low of .10%. Furthermore, given their media release following that board meeting included the statement:
“For its part, the Board will not increase the cash rate until actual inflation is sustainably within the 2 to 3 per cent target range. For this to occur, wages growth will have to be materially higher than it is currently”.
It is expected almost universally by analysts that it will remain at this historical low for quite some time to come, possibly years.
Though true that the official cash rate applies only to the overnight cost of loans between major financial institutions, it is seen as the benchmark rate and its intention is to directly influence the interest rate available to you when taking out a mortgage, and despite periods here and there when following an official cash rate decision the banks have either not altered rates, or even made an out of cycle decision, it is accepted as a general rule that if the RBA’s cash rate decision is that interest rates fall or rise, so too do the corresponding interest rates on loans and mortgages from the banks.
Whilst the savvy recognise that low interest rates are actually a reflection of challenging times, of which we are certainly experiencing an “unprecedented” chapter now, to use a much-hyped word of late, it is also too easy to be drawn into the negative commentary and lose sight of an opportunity available to many of you that could fundamentally change your asset position and bring forward your net wealth accumulation by many years.
Choosing one of the major banks and comparing home loan data tells us this;
4.98% was indicative of the standard variable rate on principle and interest for owner occupiers just last year.
5.53%. was indicative of the standard variable rate on principle and interest for investors just last year.
2.29%. is a promotional variable rate on offer for owner occupiers from the same bank today.
2.59%. is a promotional variable rate on offer for investment loans from the same bank today.
Whilst seeing these rates above may not appear overly significant, when you consider the difference and the compounding effect over the life of your mortgage, the potential savings on repayments that can be generated is significant and the reason to not only take notice, but take advantage, becomes rather more compelling.
At an interest rate of 4.98% against a loan of $500,000 your monthly repayments would be $2,678.00 per month. Reduce that to today’s promotional rates from the same bank of 2.29% and that repayment falls to $1,922.00 per month.
Now when we look at the difference, comparing the two repayment amounts to a difference of $72,909.00 in savings on interest alone over the term of the loan, but then taking a more strategic view and considering how you could take further advantage of these historical low rates, is when you not only realise the savings but can also significantly reduce the term of your loan.
Many people function almost autonomously with regard to their finances. They quickly acclimatise to their minimum monthly repayments, happy that they are meeting their obligations and “on top” of everything. This interestingly however readily includes the periods of higher monthly expenses, the times when interest rates have risen and forced their repayments up yet, despite some token protest or grumbling, they continue to meet their obligations.
It’s with this in mind that IQ Capital encourages all of its clients to reflect on what they could repay verses what they are required to repay. If like the vast majority you are able to meet your monthly financial obligations during the periods of higher interest rates and higher repayments then imagine what you could achieve with the same discipline and commitment during times of historically low interest rates, that will possibly be present for quite some time.
To put this in perspective consider this. As stated above, a $500,000.00 mortgage just last year for an owner occupier repaying principle & interest on indicative rates of 4.98% was costing $2,678.00 per month. This same mortgage at today’s promotional rates of 2.29% is now only costing $1,922.00 per month. That’s a saving of $756.00 per month.
So, if you simply maintained what was your minimum monthly repayments and applied that to your mortgage repayments today you are actually now repaying your home loan in 19 years and 4 months. This equates to $72,909.00 in savings on interest over what would have been the term of your home loan and reduces the term of your mortgage by over 10 years.
If you own an investment property and review what your repayments were last year there would now be further surplus cash flow available to you that was also just recently committed to mortgage repayments. The same is true of any vehicle finance, credit cards or personal loans that you may have had not long ago that are all influenced by the prevailing interest rate of the day. Imagine then compounding the outcomes above by applying the same strategy and recommitting repayments at a higher notional interest rate to your repayments today.
Taking advantage of historically low interest rates however should always be committed to through a strategically and structured approach following the appropriate due diligence. Are there penalties for instance if you pay off your home loan early? Are there break costs associated with your mortgage if you were to refinance to lower rates that ultimately save you little? What debts should you pay back first, when and how?
IQ Capital specialises in taking a structured approach to debt reduction that ultimately, like low interest rates, could save you tens of thousands in interest and put you years ahead of your current debt free trajectory.
IQ Capital understands that prioritising non-deductible debt and recycling capital savings otherwise committed to servicing deductible debt is the most efficient approach, and when combined with the use of an offset account, budgeting software, specialist tax advice and of course specialist finance advice securing you the most competitive mortgage, IQ Capital can advise you on implementing an entire debt reduction cycle.
What would it mean for you and your family to own your home in 20 years not 30? Imagine having the funds otherwise committed to your monthly mortgage repayments available to you. Depending on the stage of your life this could generate significant further debt reduction, further investment, or lifestyle advantages such as travel and family wealth. Taking advantage of historically low interest rates and specialist financial services could bring forward a chapter of your life you have been planning for by many years.