It’s an exciting time to be a homeowner in Australia, with one advantage to having a mortgage being the thrillingly unexpected terrain of the interest rate levels for the future. While rates are currently at an all-time low for the country, it all hinges on the banks passing these savings on to us.
Last 2016, the Reserve Bank lowered interest rates again with a 25 point basis cash rate cut. However, the bigger banks, including Commonwealth, weren’t as quick to pass on these savings to customers.
These cuts are designed to boost our economy, so the potential for them to be dropped even further is certainly on the cards. How far they’ll go is impossible to tell; However, it’s a promising time to have a variable rate mortgage at the moment.
The current situation
As of August 3rd, 2016, the Reserve Bank Australia had lowered the cash rate to 1.50%, which signaled a record low for the nation. Their reasoning for this decision was to help boost our country’s economy by supporting domestic demand, done so through lower interest rates.
For those with a current mortgage, this cut was another welcome one in a string of recent reductions by the RBA during 2016. With more cuts expected for this year, homeowners could be looking at interest rates below 1% for a new record-low within just a few months.
How the future looks for Australia’s interest rates
Although it’s nice to imagine a world with permanently low interest rates, some experts believe there could be dire consequences for such a scenario. Various financial experts have stated that the very real possibility of a sub-1% cash rate would mean investors would take bigger risks in the housing market and completely change the evaluation process for assets.
These changes could mean that Australia’s banking regulator, APRA, may impose further restrictions on borrowers so they can help balance the sudden influx of lending. With this in mind, the important question of fixed or variable interest rates is more important than ever.
Fixed or variable – which is right for you?
One of the biggest decisions that homeowners face is whether to fix their home loan rate or opt for the variable choice. With a positive outlook anticipated for even further rate cuts, it still doesn’t mean that variable is the only choice. There are both pros and cons to fixing your home loan rate, so ensure you’ve weighed them up first.
Advantages of fixing your loan
• Budgeting on a fixed home loan is simple, as your repayments won’t change over time with the rise and fall of interest rates.
• When interest rates do inevitably rise in the future, you’ll be satisfied that your fixed rate is lower than the variable.
Disadvantages of fixing your loan
• Most fixed home loans don’t allow for extra repayments, so if you happen onto extra cash it won’t be able to go onto your mortgage.
• If the interest rates continue to drop, you won’t be able to benefit from this reduction.
To know what works best for your financial situation and fiscal goals, you should speak with a specialised mortgage broker to understand what your options are. While there are current talks to drop interest rates further, there’s not enough clarity yet about whether these will be passed on by the major banks, or if firmer lending restrictions may be imposed.
The Hart Partners team in Melbourne welcome your call or email to discuss how the fluctuating interest rates may affect your personal and business plans.