While we are seeing interest rates remain at record lows for now, it will be interesting to follow the trend of lending affordability.
History indicates when interest rates are low, consumers borrow more, property prices increase and the possibility of the bubble bursting never comes into consideration.
New lending commitments on the increase
It appears 2014 is already trending similar to 2013. The average loan size for new lending commitments over 2013 showed a 3.6 per cent increase. For the March quarter 2014, it will not be surprising if commitments have increased further. The average loan size in Australia in the December quarter of 2013 was $341,971 compared to September quarter of 2013 – $326,318 – an increase of 0.95 per cent.
In addition, the average proportion of family income to meet loan repayments for the December quarter 2013 was 30.8 per cent Australia wide, an increase of the previous quarter of 1 per cent.
Taking advantage of low interest rates
So with all this going on, let us look at the many ways you and your clients can benefit from the low interest rates. Here are my major three:
1. Reduce or clear any debt which is not your mortgage
The golden rule, when you have any surplus income, is to pay down the most expensive debt first. An example is credit card or personal loan debt due to the fact that the interest rates are higher on products such as these.
2. Principal reductions off your mortgage
A great time to reduce your mortgage – this could yield very significant savings in the long term along with creating more equity in the property.
3. Putting a toe in the stock market
We all know that the stock market has taken a pounding over the last couple of years, and whether you want your clients to dip a toe into its choppy waters depends on your own feelings about its fragility. With property trending as per the figures above, wise investments in this arena could be an option.
No matter which path is taken planning becomes the catch phrase – and savvy structuring and positioning for the future can be taken advantage of in this lending environment. Working with a client to assist in the best structure prepares the prospective/ existing mortgage holder for unexpected turns in the market, which inevitably will come.
Tanya Sale is the chief executive of outsource financial, a lending, leasing and asset finance group.
