The thing about low interest rates

What’s not to love about your below-five or six per cent home loan interest rate? Low interest rates equal more money in your pocket, right?

While low rates mean families are more able to finance home purchases, and businesses are more cashed-up to build offices and factories; with low interest rates on borrowings, comes low interest rates on savings.

Given that many people work towards retirement with some variant of the ‘retire on my savings, superannuation and property income’ plan, low interest rates can have a flip-side; low interest rates can deliver low investment returns.

The reality of our present low interest rates is that they are a response to the global financial crisis and the sub-prime mortgage market crisis.Our record-low rates are the after-shocks of these events. And the knock-on impact of slower housing growth has been widely discussed ever since.

So, yes, low rates for the average family – and investor – have delivered real money into real pockets, as well as helping many get much further ahead on their mortgage payments. And this is only a good thing.

But keep in mind that when interest rates increase, it will be a response to improving economic conditions.

So, although rates remain on hold for now, it seems likely the Reserve Bank of Australia will eventually raise interest rates.

It may be helpful to consider then the flip-side of an increase in interest rates: greater returns on all asset classes, including real estate.