$13,750 reason why now is a good time to borrow money

The reason $13,750 is a good time to borrow money. Source: Getty

Interest rates have never been so low.

The recession, dire labor market conditions and worrying inflation prompted the Reserve Bank of Australia to cut official interest rates to 0.25%.

He did this for two main reasons.

For existing debt-ridden borrowers, monthly interest payments have been reduced, freeing up cash flow and allowing these borrowers to increase spending with this excess cash elsewhere in the economy.

The other reason for these low interest rates is to encourage businesses and consumers to borrow more, since debt servicing costs are so low that investing, buying a home and other expenses are now affordable for many.

Many people enter these historically low interest rates into their mortgage calculators and see how cheap it is to pay off what might have seemed like a large loan a few years ago.

For mortgages, most financial institutions offer interest rates around 2.75% or even lower, with differences in terms affecting the actual rate that borrowers can expect to negotiate. For comparison, the standard variable mortgage interest rate at the beginning of 2018 was around 5.25% in 2011 the rate was around 7.8%.

The interest-only cost of a $500,000 mortgage in 2011 was $39,000 per year; in 2018 it was $26,250 and today that cost is only $13,750 per year.

This shows the power of the interest rate cuts the RBA has made on cash flow and borrowing capacity.

I note, for the sake of completeness, that house prices are 2% lower today than in 2018, but are up 41% from 2011 levels, while wages are up 3% from 2018 levels and increased by 25% from 2011.

Not everyone can borrow in a recession

One of the problems with the recession is the obvious destruction of much of the economy. With unemployment and underemployment nearing 20% ​​and many businesses bankrupt or on the verge of bankruptcy, much of the economy is unwilling and frankly unable to exploit these incredibly favorable.

Low interest rate settings focus on those with the ability to borrow – those with secure full-time jobs, with businesses that have not only survived but thrived through the recession.

Early signs of such a recovery in borrowing are mixed, with credit growth stagnating in recent months.

Real estate prices hold up

One of the areas affected by low interest rates is housing and house prices, which so far during the recession have been remarkably resilient.

According to the Corelogic House Price Series, house prices continue to rise in Canberra and Hobart, are broadly stable in Brisbane and Adelaide, have fallen slightly in Perth and Sydney and have only been weak in Melbourne. Melbourne’s weakness is easily understandable with the strict lockdown laws in place in recent months.

In regional centres, house prices have remained broadly stable since the onset of the recession.

But even in Melbourne, property prices are down just 5% from the recent peak in April, after rising around 10% in the year to April.

Nevertheless, significant downside risks still weigh on real estate prices.

The fall in net immigration has undermined underlying housing demand. Limited demand for a given level of supply means low prices. Falling numbers of international students at Australian universities are also reducing demand for accommodation. None of these negatives are expected to reverse any time soon.

No one can be sure how long interest rates will remain at these lows. When, one day, the economy recovers, unemployment declines, and inflation and wage growth rise, interest rates will also rise, and some of the monetary stimulus will fade.

That day will likely be years not months away and even when those good times return, the RBA is unlikely to raise interest rates too soon or two and risk dragging borrowing and the economy back into the doldrums. .

Be prepared for a long period of low interest rates.v

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