What does the new interest rate mean for you?

The interest rate is now at 7%, which puts consumers in the best position possible when it comes to servicing their debts and making investments into assets like property.

Interest-bearing bank accounts

If you have money sitting in an interest-bearing account, you will now be earning less interest each month on the capital amount invested. While this is not ideal, one thing to note is that the annual taxation rate on your proceeds (Capital Gains Tax) has not changed even though the actual quantum you pay will have changed due to the interest rate fluctuations. This can put people who might live off the proceeds of their investments in a challenging position and will also mean that money that is in a Trust will also earn less interest.

Servicing your debts

Conversely, a lower interest rate also means you pay less each month on your debts. While this does not shorten debt repayment terms or decrease the capital amount owing on your debts, it means the money spent paying the interest on these debts will be less each month.

Free up equity

By paying less interest on your debts each month, you may be able to free up some money that would otherwise be spent on debt repayments. This extra money can be used to generate an income in a number of ways. Take some time to assess the best possible option for you; perhaps that is an addition or upgrade to your home that will help to increase its value in time to come. Perhaps you could build a flatlet on your property which can be let to a tenant? Savvy investors will look to channel this equity into something that will generate an income, like a rental property or help it grow by re-investing into your property.

Paying off your bond

A lower interest rate means your monthly bond repayments will be decreased. This will effectively mean more money in your pocket each month which can be used to strategically service your bond. As with any debt, the first few years of payments serve to pay towards the interest on the capital amount owing. By paying an extra 10% each month on your bond, you will begin to chip away at the capital loan sooner thereby shortening the term of the bond. By doing this you will also dramatically decrease your monthly bond repayments.

The low interest rate can help to free up equity for consumers. The best practice is to use this equity to generate more income either by upgrading a home prior to sale, investing in a second property to let out or simply to service your home loan quicker.

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