Cheaper home loans coming?

Published: September 30, 2008 - 01:03 PM

Australia is well-placed to weather the global financial turmoil

It is likely that given the global financial crisis the Reserve Bank will move to reduce interest rates possibly as early as next week. Some commentators have suggested that the Bank will reduce rates by as much as .50% or even 1%.

The meltdown in the American and UK markets has meant that credit and loans are now hard to find.

But what does this mean for normal Australians with a mortgage? When you go to the bank cap in hand to get a loan, whether for a home loan or a personal loan for a car or to take a holiday, it will be much harder.

The major banks, NAB, Westpac, Commonwealth and ANZ make their home lending decisions on two main criteria – how much you earn and how much you would like to borrow as a percentage of your home’s value. They have already begun to tighten their lending criteria and homeowners will now need to have more of a deposit saved before buying a home and the amount they can borrow may be further restricted depending on income.

But all is not lost. Australia is well-placed to weather the global financial turmoil for two reasons. Our economy’s strength is more dependent on events in China that in the US and our banking system is more highly regulated than the US system which was de-regulated by Clinton in 1998. It was this deregulation that allowed the creation of the highly complicated mortgage products that banks on-sold between themselves that have now collapsed and sent the US economy into freefall.

The reduction of rates by the Reserve Bank should make home loans cheaper for Australians. If you are paying a variable home loan rate of 8% and you receive a drop of 1% you will save $205 per month on your mortgage repayments. If the Reserve Bank makes interest rates cheaper by 0.5% that will mean you’d save $103 per month on your home loan. In these uncertain times this possibility to save on interest rates is a welcome relief for homeowners.

David Power of ShopAround.com.au said that “Australian homeowners have been hit hard by increases in interest rates over the past few years. A further drop in the official interest rate will make for cheaper home loans and mortgages for all households.Whether you are with one of the big players like the Commonwealth, ANZ, St George, Westpac or NAB or your home loan is with a more regional lender such as the Newcastle Permanent or Bendigo Bank or Bank SA it pays to shoparound.”

In these uncertain times, it’s important for all households to save as much money as they can on essential living costs. Consumers can save hundreds of dollars if they shop around for cheap mortgage rates, cheaper interest rates and the best home loan. Other savings are also available on household expenses if consumers take the time to compare gas and electricity prices. Shop around offers a free service that allows consumers to compare gas companies and electricity prices in just a few minutes at no cost.

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