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Interest Rate Reduction

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07 / Nov / 2011

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Intermingled with news of QANTAS and the Melbourne Cup last week was, of course, the announcement by the Reserve Bank that official cash rates will fall by 0.25%.

Most of the banks have announced that they will follow suit.

I have to admit, the decision took me a little by surprise as I was anticipating the Reserve Bank to hold rates steady.

Comment has been made in the papers about borrowers coming off very low fixed rates in the next little while that may struggle to adjust to the relatively high interest rates now. For those borrowers on lower fixed rates it is possible to budget for this gap now.

By calculating what repayments on your loan would be at current variable rates and subtracting your current repayments you can work out the “gap”.

This gap, if possible, could be set aside into a savings account so that the household or business budget is aligned now to future obligations.

Plus, this will build up a small lump sum that could be used to pay into the loan once the fixed rate period expires. Many fixed rate loans will allow up to an additional $10,000 per annum in repayments, so the “gap” repayment could also be contributed to the loan in some cases, thereby saving interest expenses at the same time.

Economists remain mixed as to when the next move for interest rates will occur.

While the rate cut won’t have that big an impact, it’s somewhere around $50 a month. It’s much more about confidence and the direction of interest rates more generally.

People are looking for a home and have a deposit saved, but are scared about talk of interest rate hikes, so it’s very important in terms of confidence and we’ll start to see new home buyers coming back into the market.

This will also be a short-term boost for retailers who were bearing the brunt of the pressures on consumers brought about by mortgage stress, the soaring cost of living and having to negotiate new taxes into their household budgets.

The lower rates will also keep a cap on the Australian dollar, ensuring a good result for the tourism and export sectors.

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