Believe it or not, low interest rates don’t automatically cause the sky to rain money down on homeowners and property investors. There can be both winners and losers when we are faced with a low interest rate environment as we are now. History shows that when interest rates are reduced, many Australians respond by piling on more debt in various ways. Those who have added properties in solid performing markets would obviously be chuffed with their decision, but those who pulled out their credit card to use this equity for a new car / boat / holiday may be having second thoughts.
The recent increase of local house prices, combined with yet another interest rate cut, is providing a situation where it’s a little too tempting for some Australians to use their newfound equity to pay for depreciating assets. By this, I mean a fancy new car, shiny new boat, that glamorous overseas holiday…. or even that 60 inch TV that looks far too good to pass up!
It’s when we find ourselves in a low interest rate environment that all of a sudden every day Aussie’s feel “rich”. As interest rates are reduced even further and petrol prices fall below $1 per litre, the mortgage on the family home suddenly doesn’t seem so daunting. So what do we do when we feel we have money to spend? Well, we spend it!
Unfortunately, many are not using this feeling of wealth to increase their asset base and secure their future, as several mortgage specialists are warning against the practice of using a home loan to pay for lifestyle expenses. This practice can cause newfound financial breathing room to become a tightening noose around our necks.
New reports are showing that the level of mortgage refinancing in Australia has almost doubled over the past five years, and with the latest bank forecasts on the Australian economy, don’t hold your breath for rates to rise soon. We find ourselves in a low interest-rate environment that may be the norm for quite sometime, so then questions then becomes, “Am I taking advantage of it?”.
The Commonwealth Bank has recently stated that 78 per cent of its home loan customers are up to two and a half years ahead on their mortgage repayments. This gives these wise and savvy property owners a good buffer on their debt, as well as increasing their sleep-at-night factor.
If you already have a mortgage, this is a great time to take a good look at your existing loan arrangement and do all you can to reduce your home loan. Very simple adjustments can cut literally hundreds of thousands of dollars off your mortgage in the long term. Repaying that little bit more now helps safe guard against any future rate rises, so make hay while the sun shines.
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This low interest rate environment is also the perfect climate for property investors. Slowly, we’re seeing an increasing amount of Mum and Dad’s who are resisting the urge to negatively place themselves in debt with luxuries, and instead use positively geared investment properties to add to their asset base without hurting their weekly income.
Buying the right properties in the right area also provides some much needed tax breaks for higher income earners, once again using this unique economic scenario to further hedge against future cost of living and interest rate increases.