With interest rates at record low buying a home, proceeding with the renovation or extension you have been planning, or even purchasing a couch, fridge, car or holiday using debt may become very attractive. This incentive to spend is exactly why interest rates have been reduced so dramatically since October 2008.
The global financial crisis has caused economies around the world to come to a screaming holt. Reducing interest rates to record lows is one part of the solution that central banks (like the Reserve Bank of Australia) around the world have used to encourage consumers like you and me to start spending again.
While it is the intention of the central banks and governments around the world to get you spending again you need to ensure you have your own financial house in order before you get too carried away with these debt funded purchases.
What is the guaranteed way to save money with the lowest ever interest rate?
With the lowest ever interest rate, the guaranteed way to save and make headway financially, is to pay off your debt twice as fast. If you have a variable interest rate home loan and, for example, your interest rate has fallen from 9% to 5% continue to make the same monthly payments and slash years off your home loan. This will save you save you a large amount of interest.
If you are looking to purchase your first home don't let the low interest rates and government grants give you a false sense of security and borrow too much money. Already the Australian Bureau of Statistics figures for the quarter ending November 2008 show the average first time home loan jumping $18,100 to $269,200.
Lowest ever interest rates won't last for ever
Home owners in the United States borrowing money when rates were extremely low and then not being able to afford the repayments when interest rates increased is what caused the global financial crisis in the first place. Rather than being tempted to borrow more money because you can afford it at the current record low interest rates, consider reducing the term of your loan instead – take out a 25 year loan instead of a 30 year loan for example.
You need to calculate how much you can afford to borrow based on 8-10% interest rates rather than 4-6% because over the course of your loan (if not in the next few years) rates are sure to increase.
Consumer items
Never use debt to purchase items that decrease in value no matter how low interest rates fall. If you cannot afford to pay cash you cannot afford the item.
Gavin Martin is a Financial Adviser, Managing Director of Cornerstone Wealth and founder of www.mastermymoney.com.au
Disclaimer
This article does not take into account the personal objectives, financial situation or needs of any person. You should consider the appropriateness of the information having regard to your own objectives, financial situation and needs and obtain professional financial advice prior to making any decision.