Interest rates affect everyone differently

With interest rates at historically low levels, thousands of mortgage holders are able to pay off their homes faster; but interest rate movements mean different things to different people.

If you

• have a mortgage – or two,
• own a business
• invest your hard-earned savings
• or live on your retirement fund

the decision made every month by the Reserve Bank of Australia (RBA) Board affects you in some way.

Although low interest rates help to reduce the costs of personal and investment loans, credit cards and business financing, on the flip side, investors watch returns on interest-bearing investments diminish substantially. They understandably do not celebrate with every rate cut.

So, depending on which category you fit into, here are some thoughts on dealing with interest rates:

Homeowners: With variable rates remaining low do you use this as an opportunity to build a buffer against interest rates eventually rising? Or direct your spare cash to reducing credit cards or personal loans?

• Investors: This may be a good time to consider starting a long-term investment strategy. Given that dividend yields and rents have changed in the past couple of years, it’s worth another look to determine if potential investments are likely to be positively or negatively geared.
• Business owners: Overdrafts, car leasing and other business loans may benefit from a full review. In particular, any strategy to reduce debt should be revisited. Maybe take advantage of a lower interest offer with another lender. But always balance the potential savings against any costs associated with moving your business to a new bank.
• Deposit holders: Dwindling returns on cash may make you feel like there would be little difference if you hid it under the mattress. There are always alternatives to boost your returns but it’s critical to read the fine print and understand what you’re investing in. Higher returns usually attract higher risk, so be sure your ability to manage that risk is properly addressed.

Across the economy generally, a low interest rate environment often accompanies slower economic growth, uncertain job prospects and lower asset prices, but it won’t last forever.

Now is a great time to think about how you can use the current situation to your advantage. If you would like some guidance on making the most of low interest rates, contact your financial adviser.