Borrowing smart in a debt-filled world is essential if you want to stay on top of your finances – and it’s easier than you might think.
With interest rates at an all-time low, there has never been a better time to borrow (rates were 0.25% in the UK, 0.5% in Canada, 1% in the US and 1.5% in Australia on 20 March 2017).
Whether it’s for a house or a car or to start your own business, money is cheap. So if you’re planning an investment, make the most of it.
With interest rates so low, and inflation starting to rise, the only direction rates are going to up. Here are some options worth considering:
1. Switch to a long-term mortgage deal
If your mortgage is coming up for renewal, consider moving to a five-year fixed rate deal, which are available from about 2%. The monthly repayments will be higher, but as rates start to rise you will reap the benefits.
A two- or three-year fix, while cheaper up front, could bring a nasty surprise when you come to renew.
2. Remortgage to free up equity
If your home is now worth substantially more than when you bought it, look at increasing the size of your mortgage to free up cash for home improvements or other major projects, as an alternative to a bank loan.
Say you paid £200,000 for the property with a £160,000 mortgage. You have paid off £10,000, but your home is now worth £250,000, leaving £100,000 in equity you could tap into. If you borrowed an extra £20,000, taking your mortgage to £170,000, you would have a loan to value (LTV) of 67% – still less than the original LTV of 80%.
This looks attractive with mortgage rates so low, but remember they are likely to rise. Also, lenders frown on cash raised this way being spent on ‘frivolous’ outgoings such as holidays.
If for any reason you struggle to meet the repayments, your home could be repossessed.
3. Invest in property
If you are looking for a sound medium-term investment, this could be a smart way of raising cash while interest rates are low – depending on where you are in the world.
In countries such as the UK, house price rises generally outperform interest rates by a considerable margin, and buying to let has become a popular investment.
The government increased stamp duty – the purchase tax on this type of buying – in 2016, but with interest-only mortgage rates at record lows of around 1.5%, this still represents smart borrowing – and the interest is tax deductible.
There is a potential headwind in the UK with Brexit taking place, but such is the shortage of homes in the UK that unless there’s another economic catastrophe such as the 2007-08 banking crisis, values are only likely to rise.
If you can’t afford to buy on your own, consider teaming up with friends or family and getting a mortgage together – known as ‘tenants in common’.
You will need a deposit of roughly 25% of the property’s value, and you will also need to allow not just for initial building work to bring it up to scratch for letting, but also for annual maintenance.
However, be sure you know your partner(s) extremely well, consider them to be 100% trustworthy, and that your exit strategies are aligned, or it could all go horribly wrong.
If you want to borrow money to start your own business, build a new house or fund your band’s new album, forget expensive and hard-to-get bank loans – there’s a new kid on the block.
Crowdfunding has become an incredibly popular way to raise cash, using the power of the internet. Individuals can pledge money to back your project in a safe environment in exchange for a variety of rewards.