Another interest rate cut – what’s in it for us?

by Chris Lang on December 3, 2008

RBA slashes interest rates - how much we saveEven though I don’t do news in Homeiown, yesterday’s announcement just couldn’t be ignored. RBA slashed another percent off interest rates, reaching 4.25%.

For those of you thinking “So what?” I’ll explain – this is a big deal. Normally the interest rate is moving up and down by 0.25 percent and not as frequently as RBA has been doing since September, cutting the total of 3 percent. It took them 6 years to drive the interest rates up to the point where it was in September and only 3 months to drop it to the lowest point it has been in 18 years.

What’s in it for the home owners?

If you’ve got a $300, 000 mortgage with a flexible rate, you’ll save nearly $200 a month. That is assuming that your bank will be passing on the interest rate cut. The good news is that Commonwealth and National Australia Banks are passing on the full 1% cut, while Westpac and ANZ are passing 0.80 and 0.83 percent respectively. Simply put, people with mortgages in the Commonwealth and National will save more and people with mortgages in Westpac and ANZ will save less – but everyone will save.

What’s in it for the home buyers?

With the boosted FHOG and the record low interest rates, it may look like the right time to buy, but let me give you something to think about:

If now, when the monthly repayments are $600 less then they used to be, you can finally afford the mortgage, what will you do when the interest rates start climbing up? Even if you get a mortgage with a fixed rate, the lender won’t let you to fix for more than 3 -5 years.

There are no guarantees, but chance are that the interest rate will be climbing up during those years, and even 5 years are not enough to significantly reduce your principle, which means that once your interest becomes flexible, the repayments will get much higher all at once.

Some may argue that if they wait, they will miss out on the increased FHOG, which expires July next year. Yes, you’ve been given an incentive to buy, an extra $E7000, but if the property prices fall as little as 2% (and it looks very likely that they will during 2009), you will be paying $7000 less for a house worth 350K. And that will be translating into more savings for you because the less your house costs, the less council rates you pay every year.

Don’t get the wrong idea; I am not talking you out of buying a house – but definitely talking you into looking at the big picture, thinking ahead and having Plan B.

OK, let’s hear from you now – do you think it’s a good time to buy?

Update: this article has made it to the Year End Housing Report Blog Carnival.

{ 5 comments… read them below or add one }

National Mortgage Rate December 19, 2008 at 7:10 pm

I found your site on faves.com bookmarking site.. I like it ..gave it a fave for you..ill be checking back later

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Allen Davis January 11, 2009 at 10:47 pm

Is it true that you can’t get a mortgage rate fixed for more than 5 years in Australia? Adjustable rates are a big part of what caused the mortgage meltdown in the United States. I hope your lenders will learn from US mistakes and allow fixed rates over 30 years.

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Chris January 11, 2009 at 11:10 pm

I am pretty sure that there is a limit to number of years you can fix the interest rate on a mortgage, last time I checked it was 3 years but maybe things have changed.

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Real Estate January 21, 2009 at 7:58 pm

Fixed loans verse variable loans, fix loan gives you the peace of mind knowing the repayments are stable for set amount of years with limited extra repayments. Variable loans can fluctuate in repayments and have fewer limits on extra repayments. It realy depends on individual circumstances what loan you choose

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Dallas Mortgage Rates March 4, 2009 at 4:12 pm

I am all for the fixed mortgage. I have several friends in the last few months that have lost houses due to arm loans. I will take it another step and I like 15 fixed mortgage because you own the house before you are to old to enjoy it. You pay a ton less, and it’s just smart business

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