Reserve Bank Governor Michelle Bullock is a lot more popular after this week, with a third rate cut welcomed by just about anyone with a mortgage and bringing interest rates down another quarter of a percent for a cumulative 0.75% drop this year.
While that 0.75% might be less than the surcharge you’re hit with for having the audacity of paying with a card rather than cash, if you started the year with an interest rate of 6% on your mortgage, you’ve actually had a 12.5% reduction in the amount of interest you pay each month. Now THAT, starts to look a lot more interesting – whether it results in a reduction in your minimum repayment and frees up cash for other things (let’s be honest - probably more bills) OR you leave your repayments as-is and the extra money goes towards your principal repayments.
Turning the extra towards the principal (actual money owned) can drop years off the length of your mortgage and save tens of thousands (or more) in overall interest paid over the lifetime of the loan, though depending on the flexibility of your mortgage terms, you may or may not have access to those funds again.
For those on fixed rate mortgages, you won’t get any benefit out of this latest change, though given how many clever ducks managed to lock in circa 2% fixed rates not that long ago, there can be winners and losers in fixed rates. Getting out off a fixed rate term early might cost you a bit more now though.
Looking ahead, interest rates still remain higher than they have been for the majority of the past decade, so there is still room to move rates to lift consumer spending that remains more muted than most economists would like. The US has been about the only hold-out on rate cuts but they have their own economic challenges (and this column just isn’t long enough to start down that rabbit hole).
Mortgage costs aside, what will another rate cut do for property prices? For buyers fresh to market, an increase in borrowing capacity is likely to be swallowed up by price rises, as we see more people enter the market both to buy a home and seeking a return on investment. Lower interest rates mean lesser returns from bank deposits – driving more investors into both the share market and of course property. It doesn’t look like it’s getting any cheaper out there – so be wary of waiting too long out of the market.