The low-down on low interest rates

When the Reserve Bank of Australia (RBA) recently suggested interest rates wouldn’t increase from 0.1% until at least 2024, builders, developers, property investors and anyone trying to pay off debt celebrated. That’s a lot of happy Australians!
But are low interest rates good news for everyone?

Why rates are staying low for now

Low interest rates are a way for the RBA to help stimulate the economy. At their first board meeting for 2021, the RBA said it didn’t intend to increase interest rates until inflation reached 2-3%¹, which might not be for a few years.

It’s important to note that although the RBA doesn’t intend to raise interest rates any time soon, that isn’t a guarantee that rates won’t go up before then. It also doesn’t consider that banks might put their rates up before the RBA does.

What do the low rates mean for you?

First home buyers

While this is great news if you’re paying off a mortgage, the flip side is that low interest rates play a big part in driving up housing prices.

When interest rates were higher, investors may have found that investing in the stock market would get them better bang for their buck. But taking out mortgages while interest rates are low can make property investment an attractive option.

So now when you’re looking to buy your first home, you’re not just competing with other owner-occupiers like yourself. You’re also up against an increasing number of investors who may have more money at their disposal and with a different end game in mind.

If you’re able to get a foot in the property door, you need to consider if you’ll be able to afford repayments when interest rates increase — which they will at some point.

We’re not suggesting they’ll go anywhere near the lofty heights of 1990 – imagine trying to service your home loan at an interest rate of 17.5% — but let’s go back just five years² when rates were just over 4%. What could that mean for you?

Borrow and repay over 25 years	Current interest rate	Weekly payment	Increased interest rate	Weekly payment	Difference each week	Difference each year
$500,000	2.40%	$514	4.30%	$630	$116	$6,032

Calculations

Borrow amount $500,000 over 25 years.
2.40% (average current rate). Current weekly repayment = $514 each week.
4.30% (increase from RBA’s 0.1% to 1.9% + current average 2.40%). Weekly repayment = $630 each week.

Assumptions

Calculations made using Moneysmart’s Mortgage calculatorhttps://moneysmart.gov.au/home-loans/mortgage-calculator.
Calculations as at 20 May 2021.
Scenario 1 uses the current average interest rate of 2.40%.
Interest rates don’t change for the life of the loan.
Interest is calculated by compounding on the same frequency as the repayment selected, i.e. weekly, fortnightly, monthly quarterly or annually.
It doesn’t take into account up-front fees such as loan establishment fees.
It doesn’t consider your ability to make the repayments shown. To help you consider the impact of interest rates changes, we suggest exploring the impact of a 2% interest rate rise. Interest rates could rise in future by more than 2%.
Affordable repayments can’t be less than the fees entered.

Having trouble coming up with a deposit?

With bank savings accounts not doing much to help grow your money right now, coming up with a home deposit can be hard work.

The First home super saver scheme allows first home buyers to save for their first home within the tax-friendly environment of super. This scheme could help you save faster compared to saving through a standard deposit account. For more information, check out our First home super saver scheme fact sheet.

Mid-life debt

If you’re already paying off a home and you aren’t locked into a higher fixed rate, it’s happy days for you! Making extra payments while interest rates are low can be a great chance to get the bank off your back sooner.

Interest rates can also have an impact on the way we spend. While rates are low, you might be tempted to take out a loan to do renos or buy a new car. Just make sure you consider that interest rates will likely go up in the future.

ASIC’s MoneySmart website has information on how to Get your debt under control and How to do a budget.

If you’re saving for a short-term goal – perhaps a much-needed holiday when borders eventually reopen – you won’t get much of a boost from a savings account. But the good news is you still have time on your side when it comes to saving for a longer-term holiday, such as retirement. Log in to Member Online to see how your super’s tracking. And learn about tax-effective ways you can grow your super.

Counting down to retirement

Back in the 1990s, retirees were putting their savings into bank accounts and living off the interest. Unfortunately, that didn’t last long before the recession hit and bank term deposit rates dropped to around 5% by 1994³, and living off interest certainly isn’t possible for most retirees today.

If you’re approaching retirement, now is a perfect time to review your investment options. Look at how long you have until you plan to stop working and consider your current level of risk. If you still have a bit of time, you might be happy with a higher level of risk. But if you’re counting down the weeks until your retirement party, you may want to decrease the risk.

You can read more about risk on our How to choose your investment options page.

You can review your investment options by logging in to Member Online. While you’re there, you can check how your balance is tracking and make sure your personal details and beneficiaries are up to date.

Not sure how much you need for a comfortable retirement?

There’s no one-size-fits-all approach to planning for your future. The amount you need depends on the type of retirement lifestyle you want.

As a guide, the ASFA Retirement Standard estimates how much singles and couples need to fund a comfortable or modest standard of living in retirement. You can find these figures on our Plan for retirement page.

Once you’re eligible to access your super (when you reach preservation age or meet another condition of release), you’ll have the option of accessing your super as a regular income stream (a pension), a lump sum, or a combination of both.

For more information, read about our pension options.