What to do with the interest rate savings

Buy a house, settle debt, create savings or start a small business? With the interest rate down to the lowest level in fifty years, it offers an unprecedented opportunity to invest in your own home or bring your debt down, says Samuel Seeff, chairman of the Seeff Property Group.

The 2.75 percent reduction in the interest rate provided as part of the Covid-19 Lockdown relief has brought the prime lending rate (which is also the base home loan rate) down to 7.25%, resulting in a saving on debt repayment costs of almost one third (30%)

It has made it cheaper to service debt and brought repayments down, providing savings which has put more money back into household budgets. For some, it is the opportunity to buy a house, others may use it to settle their debt or create savings.

Seeff gives seven tips for households to leverage the historically low interest rate to their advantage.

Tip 1 - Reduce your mortgage balance. If you already have a property with a mortgage loan, you can keep your payments at the original level and use the difference to pay your loan off faster. This will also create a financial buffer to enable you to absorb any future interest rate hikes as you will be used to paying the higher amount.

Tip 2 - Swop your rental for your own home. The lower interest rate means that in some areas it is now almost cheaper to buy than to rent, or there will be very little difference. If you qualify for a mortgage loan, then now is an excellent time to buy. Since the repayments on mortgage loans have come down, your earnings required to qualify will also be lower.

Tip 3 - Buy a new house. If you are thinking about trading up, this could be an opportune time to do so as you can benefit from the interest rate saving which will make your new property bond repayment almost the same as your current home. You could also potentially find your dream house at a good price, depending on the area and price band.

Tip 4 - Build a cash reserve. If you are financially secure, you can keep your mortgage payment at the old rate and invest the difference into a savings account. If you a renting and have other debt, you could keep your repayment at the same level and can tuck away the interest rate savings into your housing deposit account.

Tip 5 - Reduce your car debt. There is a big advantage to owning your car and by keeping your car repayments at the original amount, the difference could go towards reducing your car debt. It could also create a buffer against future interest rate hikes. If you are thinking about trading up, a paid off car will come in handy as a deposit on a new car.

Tip 6 - Reduce credit card, short-term loans and store card debt. Since this type of debt carries a higher interest rate, typically twice the prime rate plus, you should always aim to pay it off as quickly as possible. If you do not need the savings back into your budget, keep your repayments at the original level so that you can reduce some of the debt.

Tip 7 - Take a short-term loan to expand or start a business. If you have a small business or are thinking of starting a business, now could be a good time to take advantage of the cheaper borrowing costs. You should however ensure you are financially secure and plan for future interest rate hikes.

Whatever you choose, you should always be sensible about the interest rate saving. Do not take on more debt and bear in mind that at some future point, the interest rate will rise again, so be sure not to overextend yourself at this time.