The RBA cash rate has been stuck on 4.35% per annum for over 12 months, meaning most home loans have been hovering around 6 - 6.25% per annum.
Other countries around the world have started reducing global interest rates, making it likely Australia will follow suit in 2025.
So, who are the winners and losers from lower interest rates and what financial strategies are available?
Winners:
Those with home loans as their repayments will reduce.
Businesses as their operations are often partially funded via debt.
Companies in 'discretionary spending' industries.
Losers:
Retirees as they often have a greater portion in fixed interest/cash products.
Those who are looking to purchase their first home, as reductions in interest rates typically leads to house price increases.
Financial Strategies:
As interest rates reduce many asset prices such as houses and shares often increase. Therefore, it can often be advantageous to purchase these assets before rates start decreasing.
Interest rate decreases are bad for short duration fixed interest products, however, can have a favorable affect on the price of long duration fixed interest products. Therefore, it is possible to adjust the make up of the 'duration' of a portfolio in anticipation.
As rates reduce and people have extra surplus cashflow, it creates an opportunity to build wealth faster by allocating that surplus to additional debt repayments or investments. As interest rates reduce, on a relative basis, it makes it more attractive to invest, and less attractive to pay down debt. However, it is always important to do a specific calculation based on the estimated rates of return, your marginal tax rate and the timeframe before your next goal. Our blog post "Where to put your savings in Australia" explains this in greater detail.
As rates reduce, many people will have greater mortgage serviceability with banks which could unlock the potential to purchase an investment property or simply leave 'mortgage prison' to find a better interest rate.
By working with a Financial Planner, we can help you navigate different economic landscapes, and adjust your plan accordingly. If in recent years you have wanted to see a Financial Planner, however have not had a sufficient surplus cashflow, your opportunity could be just around the corner. You can start the conversation with us:
The purpose of this blog is to provide general information only and the contents of this website do not purport to provide personal financial advice. The contents of the our blog does not take into account the investment objectives, financial situation or particular needs of any person and should not be used as the basis for making any financial or other decisions. The information is selective and may not be complete or accurate for your particular purposes and should not be construed as a recommendation to invest in any particular product, investment or security. The information provided on this blog is given in good faith and is believed to be accurate at the time of compilation.
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