Interest rates in Australia and around the world have hit historically low levels.  So low, in fact, that for around 30 per cent of developed countries, investing in government bonds will provide negative returns after adjusting for inflation.

Why are interest rates so low?
In its simplest terms, the Reserve Bank of Australia lowers interest rates to stimulate the sluggish economy. Lowering interest rates makes borrowing cheaper and more borrowing means more businesses are established, more is consumed and more jobs created. 

Impact of low interest rates on investments and savings
Aside from house prices, there are number of effects on the economy from low interest rates and there are both winners and losers.

The share market, in particular the companies who pay relatively generous dividends, such as banks, have risen in value. In fact, despite a recent pull-back, the Commonwealth Bank, ANZ and Westpac have all hit record highs in 2015. Meanwhile, other investments in the property sector such as high-yielding property trusts and infrastructure assets have also risen.

For our retirees and others who rely on interest to supplement their income, low interest rates hurt the bottom line. Unfortunately for retirees, there will be greater need to draw upon super or other savings, the need to work longer (and spend less), or a greater reliance on the old age pension.  It may also mean greater use of things such as reverse mortgages to un-tap the wealth locked up in housing.

Impact of low interest rates on the Aussie dollar
While house prices occupy the headlines, lower interest rates are also associated with a lower dollar. This is because international investors look elsewhere for a good return on their investment.  This side effect on currencies means that in some instances, globally, central banks have engaged in ‘currency wars’, trying to devalue their currency to make their goods and services cheaper in the international marketplace.

A lower Aussie dollar also means some things are more expensive. You may have noticed this if you do shopping online at an international retailer or your planned overseas trip is getting more expensive. However, it’s not all bad news – domestic tourism operators who should see an increase in tourists. The manufacturing sector will benefit from Aussie-made products being cheaper for international buyers. And if you have overseas investments, either directly or through a managed fund, repatriating your profits just got more appealing too!

So what should people do now as a result of these low rates?
One simple way to benefit from low interest rates is to check your mortgage. Just by making extra repayments you can cut tens of thousands off your mortgage over the course of your loan.

Also consider moving to a fixed-interest loan. They can be less than one per cent higher than variable rates, however keep in mind that the closer the variable and fixed mortgage rate, the more likely (in the bank’s opinion) interest rates will drop again. And make sure you check the terms – some fixed-rate loans don’t allow extra repayments.

In terms of the share market, whilst certain higher yielding stocks look attractive relative to bonds, it’s important to recognise the increased risk in shares.

Before you make any decisions, please give us a call or pop into our Oran Park office. We service the Parramatta, Bella Vista and Macarthur area.

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