Why Your Interest Rate May Go Down This Year
Westpac, one of the four major banks in Australia, changed its interest rate forecast and predicted the Reserve Bank to deliver a cut of 0.25 percentage to the official interest rate in both August and November. This would bring down the official cash rate to just 1 per cent from 1.5 per cent since 2016.
Influencing Westpac’s outlook are the falling house prices in Australia’s capital cities. At the beginning of the year – both Sydney and Melbourne experienced a sharp decline in property prices of up to 10 per cent. In addition, there is also a downturn in residential housing construction across the country.
But What Does This Mean For Home Owners In Australia?
Considering an average mortgage size of $400,000 for 30 years at an interest rate of 3.75 per cent per annum – a 0.25 percentage point official rate cut passed on in full to home borrowers could mean a saving of over $600 a year in the above mentioned scenario.
The RBA, which is Australia’s central bank, is responsible for maintaining a robust financial system to ensure the prosperity and welfare of the citizens of Australia. To achieve this, the RBA formulates Australia’s monetary policy and sets the interest rate for overnight loans that it provides to commercial banks. This is known as the official cash rate, and it impacts the rate at which commercial banks further loan money to citizens and institutions. Therefore, when the RBA makes changes to the cash rate, banks and financial institutions around the country naturally follow suit.
Except for January, the RBA board meets on the first Tuesday of every month to decide whether to raise the cash rate, keep it at the same level, or drop it. The factors affecting the decision include the performance of the housing market and the Australian dollar, consumer confidence, and the overall strength of the economy.
A drop in the cash rate has a number of implications for Australians, especially home borrowers, as it directly affects the home loan rates.
Reduced Home Loan Rates
Most lenders typically pass on the RBA’s rate cut to their customers – therefore, if you have a variable rate home loan, you might find your monthly repayments reduced considerably post any rate cut. If you have a fixed rate home loan, you might have to wait for the fixed period to end to negotiate a better rate on your home loan or refinance to a lower rate with another lender if it serves your purpose. Here is what you must consider before refinancing your home loan.
Brisk Activity in the Property Market
With lower interest rates on mortgages and decreased property rates, more people are likely to enter the property market following a rate cut by the RBA. Lower home loan rates make it affordable to enter the housing market – leading to increased competition in the property sector that could eventually push the property prices up, making it difficult for first home buyers to purchase a house in the long run. However, FHBs may find it easier to get a foothold in the property market immediately following a rate cut.
Saving More Money on Your Home Loan
As a borrower – you must stay abreast of the developments in the property market to save more money on your home loan. If the RBA reduces the cash rate next month, you might find the mortgage market flooded with low-interest rate home loan deals that will impact your repayments significantly.
However, in the meantime, we suggest that you keep an eye out for ongoing deals and discounts. Presently, most lenders are offering a rate of three-point something per cent per annum to new borrowers as compared to over four per cent last year. If you are still paying over four per cent on your mortgage, it is time to head to a mortgage comparison site such as HashChing and check the best rate offered to customers like you. It also helps to know what options are available and if you want to secure a better rate on your mortgage.
Refinancing your home loan to a lower rate can save you tons of money if you plan it right. However, it is important to ensure that the cost of refinancing does not outweigh the savings. Besides, the cheapest loans may not have all the features you need to get the best from your home loan. We suggest that you speak to a mortgage broker to understand your options better.
HashChing is Australia’s first borrower-friendly marketplace that lets you compare broker pre-negotiated home loan deals from 70+ lenders across Australia. We are powered by a growing network of 700+ borrowers working hard to make your home loan journey pleasant and fruitful.
By Vidhu Bajaj,
HashChing Content Writer