Make the most of a record-low interest rate

Charmaine Wong, Yahoo7 Moneyhound Updated December 4, 2012, 3:00 pm
Make the most of a record-low interest rate

The interest rate cut by the Reserve Bank of Australia (RBA) to 3.0 per cent may seem like an early Christmas present to Australians.

The announcement makes the cash rate a record low in Australia, equaling that of the GFC in April 2009.

Despite a reduction in the cash rate by 25 points, Steven Münchenberg, Chief Executive of the Australian Bankers’ Association (ABA), said it is uncertain whether this cut will be passed on to consumers.

“There’s always speculation regarding individual banks’ pricing decisions on loans and deposits at this time.”

If this rate cut is passed on to Australians, it could be tempting to take advantage of this change by spending more on Christmas gifts and other holiday extras.

But there are other ways you can make the most of this rate cut this December.

Related: Why pay more than your minimum home loan repayments?

Get ahead on your mortgage

It can be enticing to pay the minimal amount for your home loan repayments with the recent rate cut.

However, if you continue to pay the same amount that you had been repaying prior to this cut, you could own your home much sooner.

A recent RBA report found about 45 per cent of borrowers have a six month “buffer” on their mortgage repayments. This gap can be a source of financial security should your income fail in the future. Approximately 40 per cent of borrowers have a buffer of more than one year while the RBA said, “large buffers are fairly common”.

Keeping your repayment amount the same will mean you pay off more of the principal of your mortgage with the added bonus of paying your lender less interest.

Related: How to get back on track with your mortgage repayments

Pay off debt

The interest rate cut could help you pay off other debts such as a credit card debt. If you pay more than the minimum amount required, you could signficantly cut down the amount you owe and be on your way to a debt-free new year.

If you have multiple credit card debts, you may need to prioritise which of these you will pay off first. Paying off the card with the least amount owing may give you the financial confidence to tackle your other credit cards. However, paying off the credit card with the highest interest rate will mean that you will pay less in interest.

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