Are you making the most of low interest rates?
Interest rates in New Zealand are lower than they have ever been, but no one knows with certainty what the future holds. The cash rate or bank rate (which differs from interest rates) is currently at 2.25 and refers to the rate of interest which the central bank charges on overnight loans to commercial banks. This rate can have widespread repercussions for the economy as a whole. With talk that interest rates will remain relatively low into the future, it’s a good time to review if you are making the most of them.
How low interest rates can work harder for you:
- Consider fixed rate options. While rates are at an all-time low there may be opportunities to fix your loans for three or five year periods at under 5 per cent per annum. Explore your options.
- Review your position. Low interest rates offer an opportunity to refinance or revise your payment schedule to pay your loan off sooner. Talk to your adviser to see if there’s a home loan that better suits your needs.
- Debt reduction. With lower rates, the amount you repay each month will be less. If you put the difference into extra repayments, you can shave years off the term of your loan and save thousands in interest. For example, a $500,000 home loan at an interest rate of 7 per cent per annum requires repayments of $3,078 per month over 30 years. At 4.5 per cent per annum, the repayments are $2,533, a difference of $545 a month. If you put that $545 into extra repayments, you can potentially take more than nine years off the home loan term and save almost $140,000 in interest.
- Create an offset account. A money source sitting beside your mortgage, any savings inside the account are included as a credit against your loan, which in turn reduces the amount of interest you pay.
Of course, low rates will not be around forever. Borrowers are advised not to become complacent and to make sure they’re covered if, or when, rates increase.