December 2008 has seen Australia’s Reserve Bank cut the country’s official interest rate by 1 percent – reducing the cash rate to its lowest level since May 2002.
It is understandable that mortgage holders would rejoice at the news, but of the big banks only the Commonwealth Bank and National Australia Bank announced a full flow on to their variable mortgage rates. Non-bank lender Edge Financial Services has also passed on the full 1% to put their variable rate at 6.95%, whereas Wespac will only pass on 80 basis points to its customers, and the ANZ just 83 basis points.
Following the Reserve Bank announcement, the Federal Treasurer, Wayne Swan, said in Parliament that ALL banks should pass on the full cut to borrowers.
Analysts believe that the RBA is nearing the end of this cycle of aggressive cuts and many were surprised at the 1% cut, with most expecting just 75 basis points to be on the cards.
Home Loans
The rate cut was welcomed, understandably, by housing lobby groups.
A 1% or 100 basis point cut reduces by around $220 the monthly repayment on a $350,000 mortgage, and since the Reserve began cutting rates each month from September, monthly mortgage repayments have been cut by an estimated $710.
Chris Lamont, from the Housing Industry Association said “Rate cuts are providing mortgage relieve to existing home owners, but importantly helping more first home buyers purchase a home of their own. Rate cuts combined with the First Home Owners Grant is making homeownership a reality for a cohort who had all but given up.”
“The substantial drop to interest rates lifts the borrowing capacity of entry level buyers who are now also armed with a $21,000 FHOG. We are seeing a new group of first home buyers. These are people in their thirties and forties who are looking to take advantage of the interest rate cycle and the boost to FHOG,” Lamont said.
Refinancing
Borrowers who are locked in to a fixed-rate mortgage however, may not be celebrating. When looking to refinance they face a difficult choice: continue to pay a higher interest rate, or incur what is often thousands of dollars in penalty fees in order to break their current fixed contract.
They need to consider more than the interest rate – there can be a plethora of conditions attached to exit fees. For instance the four major banks charge upfront fees ranging from the ANZs $300 to a $900 fee from NAB. Charges may also be applied by the new lender.
While fees vary, a borrower who cancels his loan within the fixed period will usually be forced to compensate their mortgage provider for the “economic cost” of breaking their contract. As interest rates fall, this cost becomes greater, and it may already be too late for fixed borrowers to save by refinancing.
Christopher Zinn, from Australian consumer group, Choice, said such fees can often come as a shock. “People who are on a fixed-term mortgage are invariably surprised to find out the size of the break fee when they choose to refinance,” he says “Often it can be far higher than people expect.”
Discussing your options with a qualified financial services consultant (link to Edge home page) should be the first step of all mortgage holders to ensure they are armed with the information needed to make decisions that affect their financial security.
With a commitment to providing the best value to its clients, Edge Financial Services, has agreed to pass on the full 1% interest rate cut, with the current variable rate being just 6.95%. Contact an advisor who is committed to giving you the financial edge. (link to Edge products page)
