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The Reserve Bank has cut its official interest rate to a record low 1.5 percent, but that can be good news or bad news depending on where you sit.

The idea is that lower interest rates will get people spending money faster and it could mean lower mortgage rates, but what if you are relying on interest from a term deposit?

Here’s the Good, the Bad, and the Ugly truth about low interest rates

The Good

  • Mortgage rates are also at record lows. You can get a mortgage for under 4 percent right now, and they could go lower. This means you pay less per month on your loan, and you can probably afford to borrow more and stretch to buy that dream home.
  • If you’ve got other personal debts, it’s smart to consolidate them within your mortgage. Why pay 20 percent or so on your credit card when you could be paying less than 4 percent on a slightly increased mortgage?
  • Low interest rates keep the value of the Australian dollar lower. This is good if you are an exporter (or if you work for one), because what you sell will be cheaper to customers overseas.

The Bad

  • If you are a saver and are looking for a healthy rate on your term deposit, you’ll be cursing low interest rates. Back in 2008 or so the banks were offering around 8 percent, today you’re looking at 3 percent if you are lucky. And that will probably fall now that the RBA has cut official rates.
  • Low interest rates are pushing up house prices. Sure, you might be able to afford to borrow more, but that just means you’ll pay more.
  • When interest rates are low, it generally means the economy is slower. If you are in a business at the mercy of consumer demand, you might be doing it tough.
  • If you are an importer, the lower dollar means what you import is more expensive. If you work for an industry that relies on imports, the business will be handicapped. Will that have an impact on your job security.
  • With the dollar lower, overseas holidays are more expensive.

The Ugly

  • Not everyone passes on lower interest rates to consumers. If you are paying 20 percent interest on a credit card, you won’t be thinking that interest rates are low. And you can bet they won’t come down just because the Reserve Bank rate has been cut. Already, the Big Four banks say they won’t be passing on the rate cut to their mortgages. If you are a homeowner with a mortgage, that’s ugly news.

 

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