Why are interest rates at an all time low?

Australian interest rates are at an all-time low. The base interest rate in Australia, as set by the Reserve Bank of Australia, is currently at 0.1% (as of May 2021); the lowest it has ever been. This affects all interest rates on loans and savings accounts across the board, including home loan rates.

Let’s take a look at why interest rates are currently so low and what this means for Australians, especially those who are looking to buy a home.

COVID-19 & economic factors

Like everything in the past year or so, COVID-19 has had a huge effect on interest rates. The enforced lockdown and quarantine procedures had the inevitable effect of increasing unemployment rates (although this is now stabilising in Australia). Many people who had secure employment at the start of 2020 found themselves unemployed and struggling. To help this rapidly growing demographic, the Reserve Bank lowered the base interest rate.

What’s more, uncertain times leave people reluctant to spend money. As a result, Governments use financial instruments to increase liquidity which improves the availability of money. This allows the Reserve Bank to lower interest rates to encourage people to borrow and spend, which supports consumer confidence and in turn supports higher employment.

Global confidence is also at play as economic certainty overseas influences Australian interest rates. Major nations including the US have a long period of recovery ahead. This also influences the price of money in Australia.

The benefits and drawbacks of low-interest rates

The lower the interest rate, the ‘cheaper’ loans become. This allows people to borrow to purchase a car so they can get to and from work, or to afford the repayments on a home loan.

With low-interest rates, either their repayment will be smaller or the borrower can pay the vehicle off in less time. The same goes for people who borrow to buy a house.

The drawback of low-interest rates is getting little yield from your savings. To grow your wealth, you may decide to invest, for example in a property. This has the potential to deliver higher returns, although you should always get professional advice before you borrow.

How long will this last?

Although it is not possible to predict the future, some believe the Reserve Bank may maintain our low-interest rate until 2024. Alternatively, some economists believe that if economic growth rises more sharply than forecast, we may see interest rates rising as soon as 2022.

What should I do when interest rates are low?

If you have some savings and steady employment, a period of low-interest rates can be an ideal time to buy a home. With rates so low, you may save thousands of dollars on your home loan.

To prepare to borrow for a home loan, use a good interest rate calculator to work out your repayments. Make sure that you set up a foolproof budget, learn the steps so you know how to get approved for a home loan, and get to understand the fundamentals of borrowing as much as you can. It makes sense to work with an independent lending specialist who can help you make the right decisions for your circumstances.

Want more info on current interest rates and the best mortgage rates? Talk to an expert at MoneyQuest today.

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