With the world still heavily under the influence of an overdose of GFC chaos, interest rates in Australia have hit their lowest rate in decades with the possibility they will fall even further.
This graph shows the last 23 years, the period since the ‘Recession We Had to Have’.
Rates dropped quickly when the GFC first hit, but then climbed during 2009/2010.
Everyone knows that if you are a borrower, high interest rates hurt because more of your energy each week is burned up on just treading water and less goes to actually paying off your loan principle.
If there was ever a time to really focus on reducing your debt it is when interest rates are low. More of your hard earned money goes off the principle (what you owe) and less goes to interest.
Here are some figures that will make this really obvious.
At 6% interest rate
Repayments on a $100,000 loan over 20 years = $165 a week
This same amount deposited into a savings account each week at the same interest rate for 20 years would amount to $333,000!
At 9% interest rate
Repayments on a $100,000 loan over 20 years = $207 a week
This same amount deposited into a savings account each week at the same interest rate for 20 years would amount to $595,000!
At 12% interest rate
Repayments on a $100,000 loan over 20 years = $253 a week
This same amount deposited into a savings account each week at the same interest rate for 20 years would amount to $728,000!
I’ll say it another way; $100,000 loan is costing you only $333,000 of lost savings opportunity at 6% but at 12% it is costing you $728,000 in lost savings opportunity.
When interest rates are low, growing your savings is hard but getting out of debt is easy. When interest rates are high, growing your savings is easy but getting out of debt is hard!
At $207 a week that $100,000 would pay off in 13yrs 6 months at 6%.
At $253 a week that $100,000 would pay off in 10 yrs at 6%.
Now is the time to really get stuck into your debts/loans and hammer them to death!
If interest rates rise you will regret that you did not take this opportunity because every cent you are in debt then will be twice as hard to pay off as it is now!
Now is the time to put your desire for socializing and buying ‘stuff’ to one side and focus on getting out of debt!
You should look for the signs to see whether interest rate pressure is up or down. I have one simple test for this. Look at the banks fixed interest rates. If the longer term fixed rates are higher than the current variable rate then the banks research says interest rates are likely to be on the way up. If the longer term fixed rates are lower than the current variable rate then the banks are expecting a drop.
Now is the best time to be getting your debts paid off. When interest rates fall, keeping your repayments at the previous higher level will pay huge dividends. You might want to even consider playing a game with yourself. If interest rates go up you will manage to find the extra money to make your loan repayments so why not pretend that happened!!
I never met anyone who regretted saving too much, but I’ve met plenty of people who regretted borrowing too much!
Founder, Simply Budgets