Lowest Cash Rate in History
With the Reserve Bank of Australia having one of the lowest cash rates in its history of 1%, what does this mean for you?
Well of coarse there is both good and bad news.
First the good news:
- Mortgage Rates are at the lowest they have ever been.
- Most lenders are offering home loan rates of around 3.4%
- Investment loans, on the other hand, are still loaded at around 4.3%
- Personal loan and credit card rates are still high anywhere from 9.9% to 21.99%
What are your options:
- Keep paying your home loan as if you were still on a higher rate
- Even better pay extra, by paying extra you can reduce the principal of the loan by just increasing the repayments, which in turn means you can pay less interest.
For example: the following table is a loan of $500,000, with repayments over 30 years at 4%, approximately $2400 per month. With the interest rate reduction to 3.4% and by keeping the repayments the same at $2400 the loan term will reduce by 4 years.
Now the bad news:
- Well if you have savings in the bank you are not earning much interest – probably next to nothing
- If you are a pensioner who is living off cash savings, your money is not growing
- If you are traveling or looking to travel, the Aussie dollar is very low in comparison to the US dollar actually at a 10 years low
- This is good for Aussie exporters as Australian goods will look more attractive due to price
- But not good for Aussie importers as it will cost more to bring goods in due to the exchange rate.
What are your options.
- Look at diversification options to increase your earning capability
- Diversify some of your cash into managed funds and shares to spread risk and increase returns
- For example: the following table is an investment of $100,000 with the purple column invested in a diversified fund earning 5% with 1% fees and the blue column is showing funds invested in cash in the bank, earning 1%. As you can see in this scenario over the 5 years the diversified investment earns more.
So for people with mortgages, this low cash rate is amazing. You should make the most it and reduce as much debt as you can. For people with cash savings in the bank, you need to look at diversification. This may mean looking at other investment options such as shares and managed funds, as well as still keeping funds in cash. If you were to spread your risk and diversify a portion of your cash and invest it, you could increase your returns overall.
The above information is general information only and you should see a financial planner or investment adviser for advice in regards to your personal situation.
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