01.Interest rate trends
Interest rates are nearing historical lows. The Reserve Bank of Australia (RBA) has dropped the cash rate 2% since November 2011, while the standard variable mortgage rate dropped 1.35% in the same period. The banks say the 0.65% variation is due to high wholesale borrowing costs and competition for your savings and investment accounts, but that’s about to change.
In this article we look at:
The RBA’s assistant governor (financial markets) Guy Debelle noted in a recent speech that there has been a general decline in wholesale borrowing costs in the second half of 2012. Meanwhile, anyone with a savings account will tell you interest rates have been falling on them.
IMB, BMC Mortgage, and Holiday Coast Credit Union all cut their standard variable rates during February, despite the RBA cash rate remaining unchanged since December, while ANZ cut its variable rates by more than the cash rate in May.
But what does all this really mean for you?
Buying a new home
While the smaller lenders are lowering their rates, standard variable interest rates have only been lower than current levels for less than two of the past 40 years on average. In the long run, interest rates are more likely to go up than down from their current levels.
When buying a new home, Robert Drake of ASIC’s MoneySmart website
advises drawing up a budget and evaluating the reliability of your income.
- You can use MoneySmart’s mortgage calculator to get a sense of the repayments, but make sure you take into account any possible changes to your circumstances.
- What will happen if you find yourself in between jobs, not getting as much overtime, retiring or adding the cost of a new child to the bills? Will you still be able to afford those repayments?
- To address these scenarios and the possibility of a rate rise, Drake suggests building in a buffer of one to two per cent.
- You should also consider paying this extra percentage down now, either into a mortgage offset account or redraw facility.
Anyone who has a mortgage will tell you the first few years are the toughest, so doing this can not only reduce your interest payments but also ensure you have a buffer to draw upon should your circumstances change.