OPINION: Interest rates are at record lows, which means that mortgages (through interest payments) have never been cheaper. Still, the cost of consumer debt – credit, store, and long-term finance cards – has not gone in the same direction. I even received an email from a bank earlier this week saying that a few of their credit cards were now making less money Airpoints Dollars per dollar spent, while their annual fee would remain the same.
At a time when wholesale consumer debt financing is at rock bottom prices, there’s no need to press consumers on Airpoints while still charging an interest rate of about 20 percent, not the cost of borrowing. But if you haven’t considered it yet, now is a great time to repurchase your existing cards and debt. There are some great deals that will save you money on interest and ongoing charges, which I outline below.
Paying 20 percent a year on rolled credit card balances when term deposits earn about 1 percent seems irrational. Fortunately, some great low-interest credit cards are hitting the market, with Kiwibank specifically dipping below 10 percent a year, making those pesky debt balances half the cost to repay. It’s one of the few examples where low interest rates make significant differences to your finances – ASB’s long-standing Visa Light card is another popular option.
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If you’re in a situation where you’re dragging credit card debt, a simple online search for low-interest credit cards will reveal what’s available and how the banks (mostly) welcome new customers with open arms. It always surprises me that low interest cards aren’t more popular given the savings they offer.
A step above low interest credit cards are balance transfer credit cards – possibly the best-kept secret of personal finance. Many banks offer interest rates of 0 percent or 1.99 percent per year for 6 to 24 months, which crushes the redemption cost. Again, if you’re stuck with credit card debt, shuffling to a balance transfer (and cutting up the existing card) doesn’t have any downsides if you commit to paying a portion each payday.
Debt Consolidation and Personal Loans
New Zealanders have deposited billions in term deposits offered by banks and credit unions who have frantically lent it to homeowners. With Lending to SMEs is being curtailed and the hunger for consumer debt is growing, according to the laws of supply and demand, there should be a fall in personal loan interest rates. The reality is different: most banks still charge between 13 and 18 percent a year in secured and unsecured personal loans, despite being inundated with cash.
However, if you have a solid credit history (i.e. no defaults) and healthy cash flow, you can probably get a better deal than the rates discussed above. Lenders mainly care about affordability, so if you already manage your repayments well, chances are low interest rates are on offer.
Approaching an alternative lender (peer-to-peer and credit unions, etc.) can be rewarding. We saw a peer-to-peer lender, Lending Crowd, this week lower its secured personal / debt consolidation loan rate to a record depth of 5.03 percent this week. Credit unions may not be that cheap, but many are desperate to lend money and adjust their rates accordingly and / or brandishing fees to entice borrowers.
Mortgage rates are low and stable, so if you’re going to take out a new mortgage in the coming months, there are some incredible deals. But to get them, you have to call the lenders and make arrangements or, more conveniently, use a mortgage broker. I, like many MoneyHub users, prefer the latter. While their services have always been popular, their expertise and full service was demonstrated at the beginning of the year COVID-19 when things were much less certain.
If you’re looking to cut down on borrowing costs and increase your repayments, mortgage brokers may be the best starting point, even if you haven’t used one before. Best of all, their service is free (the lenders pay them indirectly) and they compare the market at length.
The next move is yours
The bargain interest rates we are seeing now offer a chance of a debt reset for hundreds of thousands of New Zealand households. With so many lenders cutting their interest rates and offering lower-than-usual credit card, debt consolidation and mortgage fees, we’re living in a debt service honeymoon.
Christopher Walsh is a Senior Researcher at MoneyHub.co.nz and believes that the super low interest rates we are seeing today are temporary and open many new opportunities for borrowers and investors alike.
Video courtesy of RNZ
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