If you’ve bought your first home in the last decade or so, you could be forgiven for thinking that the interest rates you’re enjoying now are about where they will always be.
The Reserve Bank started cutting interest rates back in 2008 as the country headed into recession, and then cut more rapidly as the Global Financial Crisis hit.
Apart from two wee blips where they started raising rates only the cut them again soon after, the benchmark interest rate has remained at or below 2.5% ever since.
That’s almost a decade of exceptionally low rates and given today the Reserve Bank kept rates on hold at 1.75%, and doesn’t forecast raising them until late 2019 or even early 2020, it’s no wonder that many home owners have come to believe this is normal.
Trouble is, it isn’t.
Last year the average two-year fixed rate was about 4.58%, but ten years ago it was more like 9.34%. While they are a long way off returning to those levels, it’s an opportune time to ask yourself – what would your household budget look like if you were paying rates like that?
We’re already started to see borrowing costs rise, if only marginally. If you have any portion of your mortgage floating, you may have noticed those rates have started to creep up, even though the official cash rate hasn’t.
The reason given is that because our banks source so much of their funding offshore, if that funding becomes more expensive, it flows through to floating rates quite quickly. It could also have something to do with banks trying to restore their margins.
But if you’re safe in the knowledge you’ve got a great fixed rate locked in for many years to come, why should you be worried?
Two things – one, many people have worked out what they can afford to borrow based on these extra-low rates. You need to be sure you can continue to service your mortgage when (and it is a case of when, not if) rates start to rise.
Two – this is actually your chance to get ahead, because borrowing has almost never been cheaper. If you’re not making progress on your mortgage now, you need to get that sorted, fast, to make the most of these conditions.
Low interest rates won’t be here forever, but while they are they present an opportunity to get closer to being mortgage free, faster. Make sure you don’t waste it.
– Hannah McQueen, enableMe Financial Personal Trainers