3 ways lower interest rates could affect your finances

The Reserve Bank of Australia’s (RBA’s) decision to slash the base interest rate earlier this month didn’t exactly come as a shock. The UK’s decision to leave the European Union and China’s slowing growth have caused ripples across the global economy.

RBA’s board reduced the interest rate by 25 basis points, bringing it to an all-time low of 1.5 per cent. But what impact are these changes likely to have on the average Australian family?

Here are some of the everyday effects that could affect you and your financial plan.

Lower mortgage costs

One of the biggest benefits of reduced interest rates is that your monthly mortgage costs could be set to fall if you’re on a variable rate home loan deal.

Now could be the time to consider redirecting your savings into an investment.

However, the amount of money you can expect to save will depend on how much of the 0.25 percentage point interest rate deduction your mortgage provider passes on to customers.

Figures from Canstar revealed that the average standard variable interest rate for owner-occupier mortgages was 4.74 per cent in May. That means someone with a 30-year $300,000 mortgage would save approximately $540 a year.

If you decided to continue paying the same amount on your mortgage despite lower rates, this could save you more than $32,706 over the lifetime of a home loan.

If you are planning to invest, consider first talking with an adviser about it to ensure you will be making the most of your situation.

Cheaper borrowing

Both businesses and households should have access to cheaper loans as a result of the interest rate reduction. This could be particularly useful for new start-ups, as well as growth-oriented companies and property owners looking to make home improvements.

After all, they say you have to spend money to make money! Nevertheless, you should always seek advice before taking on more debt to ensure your decision fits into a wider financial strategy.

An experienced adviser can take you through all the available options and tailor a plan that better fits you and your family’s needs.

Reduced interest on savings

Unfortunately, lower interest rates aren’t always good news! It’s likely that the RBA’s decision will affect savers, as banks often lower the rate of interest applied to your savings account.

Don’t panic, however, as now may be the time to put the money you’ve saved for a rainy day to good use. When interest rates are low, you may find that using the cash you’ve put aside to pay down outstanding debts or loans is a better option.

Alternatively, now could be the time to consider redirecting your savings into an investment where you may experience higher returns.

Would you like to know more about how interest rates could affect your financial planning? Get in touch with us today for more information.

What you need to know

This article contains information that is general in nature. It does not take into account the objectives, financial situation or needs of any particular person. You need to consider your financial situation and needs before making any decisions based on this information. If you decide to purchase or vary a financial product, your financial adviser, Invest Blue Pty Ltd and its subsidiaries operating as Invest Blue, 1300 346 837 and other companies within the AMP Group may receive fees and other benefits. The fees will be a dollar amount and/or a percentage of either the premium you pay or the value of your investments. Please contact us if you want more information.