Nov 30

Where are home finance interest rates heading?

Published in new car financemortgage brokerhome finance by Vicky Edema
The good news is that home finance interest rates are heading south! The Reserve bank of Australia like other banks around the world has been effectively reducing the cost of home finance by cutting the Official Cash Rate over the past few months. Australia saw a drop of 1% in the cash rate in October and then another 0.75% in November and the likelihood is that the RBA will pass on a further rate cut in December.

Some economists are forecasting that variable rate home finance will get even cheaper with predictions that the RBA could drop the Official Cash rate to as low as 3.75% p.a. After the November rate reduction the OCR stands at 5.25% and home finance lenders are in the market with home finance in the low 7% p.a. region. This is good news for all home and investor borrowers as well as those who rent. The higher cost of money in 2007 had economists predicting a surge in rental costs. Hopefully with the lower cost of funds and the consequent lower cost of home finance and investment loans, rental homes will become more affordable. If the OCR does get as low as 3.35% - in the US some economists believe it will be below 1% in America – then the home finance rates should reduce to around 5%p.a – what a difference that will make to household budgeting! And that is the very reason behind these rate cuts – at the moment high rates have hit business and consumer confidence in the economy and as a result business is not investing and consumers are not spending. Governments are mindful of the paradox of thrift – if consumers save and minimise spending then production levels are cut and that in turn results in workers being put off – unemployment escalates, people remain anxious, they continue to save rather than spend (just in case they too are out of work) and the economy grinds to a halt as a result. Recession quickly moves to depression.

The RBA rate cuts, as well as the government guarantees on deposits are all intended to instil confidence and encourage consumers to spend so that the economic wheels keep turning! So do make sure that as these rate cuts flow through on your home finance, that you don’t stash the cash under your bed but rather spend a little so that everyone stays in work and the country continues to prosper. Because so many Australians have home finance debt, a reduction in the home finance interest rate generates a significant cash flow benefit to hundreds of thousands of people. Provided this cash surplus (or at least some of it) flow back into the economy then slowly but surely we will see an improvement in our outlook.

Once home finance rates reach what you think might be rock-bottom you should seriously consider fixing your interest rate because like all good things – low home finance rates will come to an end! So keep your ey on home finance rate movements and stay informed of what the economists and the RBA are saying – if the inflation rate starts to increase with economic growth then that could be the time to consider fixing the rate on any home finance or investment debt.
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