Just how low can interest rates go?

The Reserve Bank of Australia (RBA) cut rates for the first time in almost three years in 2011 and since then we’ve been watching interest rates fall. Interest rates in Australia are now at record lows. After the RBA’s recent decision to keep the cash rate at 1.5% will we see interest rates drop even lower? And just how low can interest rates go?

So what do low interest rates mean?

In simple terms an interest rate is the cost of borrowing money. So when interest rates are low it generally means that it’s cheap to borrow money. This is usually great news for property investors who have a mortgage for their investment property.

So what impacts on interest rates?

The RBA’s cash rate is one of the main factors. It sets the rate or value of cash within our economy. If the value of cash increases (e.g. the cash rate rises) then the cost of borrowing money is going to increase too. That’s why we see interest rates following the cash rate set by the RBA.

The RBA sets the cash rate based on inflation, national debt, GDP and other economic considerations. So these all impact on interest rates to some degree as well.

However, it’s interesting to note, that while the RBA cash rate decisions would traditionally have guaranteed a corresponding fall in interest rates, this is less certain nowadays. This is due to wider issues within the economy that are affecting lending institutions. The decision is also being influenced by other issues such as wholesale funding costs. Whether or not banks decide to pass on rate cuts is now a far more delineated process.

So how low can interest rates go?

The RBA released a statement after its recent rate announcement saying that it had left the cash rate unchanged as,

“The global economy is continuing to grow, at a lower than average pace. Several advanced economies have recorded improved conditions over the past year, but conditions have become more difficult for a number of emerging market economies… In Australia, recent data suggest that overall growth is continuing, despite a very large decline in business investment, helped by growth in other areas of domestic demand and exports. Labour market indicators continue to be somewhat mixed, but suggest continued expansion in employment in the near term…. Inflation remains quite low… Low interest rates have been supporting domestic demand and the lower exchange rate since 2013 is helping the traded sector. Financial institutions are in a position to lend for worthwhile purposes.”

(http://www.rba.gov.au/media-releases/2016/mr-16-23.html)

This means that our economy is basically doing OK. We’re definitely in a better position than some other global economies. For example, the UK is currently sitting on a cash rate of 0.25% and the US is at 0.5%.  This means that we have more room to cut rates further if the RBA thinks it needs to stimulate our economy in the future.

So are low rates good for property owners?

Low rates can be good news for borrowers as they can potentially decrease the amount of repayments on mortgages. However, this will be determined by what sort of mortgage you have (fixed or variable) and whether the banks actually pass on the lower interest rates.

So how do we take advantage of low rates?

Shop around to find lenders who are offering the lowest rates and consider keeping your repayments at the same amount if your bank does pass on the rate cut. Always talk to a financial expert before making decisions like this to ensure it fits your personal situation.

Being prepared for an increase in rates is also important. Rates may be low now but it’s likely they will go up at some point. Keep this in mind before making any property investments and always talk to the experts to make sure that you make the best decisions for you.

After all, investing, particularly property investing, is never a one-size fits all game.

If you’re in the market for an investment property have a look at our residential properties for sale or our commercial properties for sale