How you can take advantage of low interest rates

How are you taking advantage of these low interest rates? If you're a variable-rate mortgage holder, you can do nothing and you will continue to save.

In fact, the comparison website finder.com.au says that, for an average $300,000 mortgage at the average variable interest rate of 5.35%, maintaining your repayments at the level they were before the rate dropped in February would save you at least $20,000 over the life of a 30-year loan.

This raises the question: "How much more could you save if you also made a change?"

Should you increase your repayments and reduce your loan faster? Should you reduce your repayments and use the money to accumulate wealth elsewhere? Should you lock in (maybe you already have and now wish you hadn't) or should you just find a better deal?

After all, the experts at ratecity.com.au show the gap between the average and the lowest rate is 0.8% - that's more than three RBA rate cuts, meaning a further saving of $150,000 might be made on a $300,000 loan just by refinancing.

Maintaining or increasing your repayment is by far the lowest-risk strategy.

Whether you put the funds directly into your loan or into an offset account, it is the safest bet for home owners whose debt is relatively large compared with their income or if they're not well ahead in repayments.

You could protect your interest by locking in.

RateCity's product director, Peter Arnold, says that if you don't think there will be any more Reserve Bank cuts, then there is money to be saved in locking in a low one-, two- or even three-year fixed rate, provided your lender has a good one or the switching costs make sense.

"If you think rates still have further to fall, then it really comes down to how many cuts and when they happen," he says.

"The longer-term fixed rates currently make sense only if you think rates will go up in the same time frame, which at this point is very hard to pick."

According to RateCity's database, three-year fixed rates are sitting slightly below standard variable rates while four- and five-year fixed rates are still slightly higher. There's a 1.05% spread between the lowest and highest three-year fixed rate, while the spread between the highest and lowest 
variable rates is 2.15%.

Given interest rates are so low, investing elsewhere is a strategy that can work well, according to financial adviser Joanna McCreery, of Majella Wealth Advisers - but only if you're ahead on your loan and have a relatively secure income.

For example, if you are over or close to your superannuation preservation age, then maximising your salary sacrifice is a great way to reduce tax and accumulate assets.

McCreery says you save tax with this strategy because your salary sacrifice contributions are paid into super from your before-tax income and attract a concessional 15% tax rate if your income is under $300,000.

If your marginal tax rate is 37% (say you are earning $100,000pa), then rather than paying an extra $1000 a month into your mortgage, you could salary sacrifice $1640pm into your super.

After 15% super contributions tax, this boosts your super by $1394pm. Five years of this strategy would give you an extra $23,640 in super.

"Once you are over 60, if you are still working, you can use tax-free pension payments from your super to help boost repayments on your mortgage. Once you retire, you can withdraw a tax-free lump sum to pay off the remainder."

If you're still a long way from retirement, McCreery says you should look outside super.

"You may be able to use the low rates to take out a low-cost investment loan against your house to seed a sharemarket investment. You can then use the extra cash from reducing your loan repayments to start up a savings plan into this investment portfolio. Alternatively, you could consider borrowing to buy an investment property."

Paul Clitheroe tackled this question last month and summed it up nicely when he said the answer lies in your attitude to risk.

For him, money in a mortgage earning around 4.6% (you may get it even lower now) is risk free and tax free. Sometimes the answer to your financial woes can be that easy!

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