Hefty Rate Drop to Kick Off 2009 – Mortgage Choice

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Mortgage Choice has mixed feelings about the Reserve Bank of Australia cash rate decision for February. On one hand, it means mortgage holders will see another significant drop in their repayments but on the other it means the economy is continuing to contract, and therefore requires further stimulus.

In its first official interest rate decision for 2009, the Reserve Bank reduced the country’s cash rate by 100 basis points to 3.25%. This sees the cash rate hit a 45 year low.

Mortgage Choice Senior Corporate Affairs Manager, Kristy Sheppard said if lenders follow suit and match the cut, the sizeable saving to new and existing borrowers will be readily welcomed.

“I’m sure both current and potential mortgagors will breathe easier now their budget restraints should have loosened a little. Of course, how closely each lender matches the cut is difficult to predict,” she said.

The cash rate reaching such a historical low is great news for mortgage holders and those about to purchase, but also signifies the Australian economy is not in good health. The Reserve Bank appears to be digging deep to prompt an expansionary effect; an understandable approach given the slowing of consumer and business spending, and in the demand for credit.

Regardless, levels of mortgage stress should fall.

If the cut is passed on in full by the lender of a fairly standard borrower – someone who owes $300,000 at the average standard variable rate of 6.99% over a 30 year term – the difference in the mortgage repayment level is about $197 per month. This borrower’s minimum repayment level will have reached about $1,797 per month.

If 75 basis points are passed on, the repayment level difference is $148.69 per month.

If the borrower ignores a 100 basis point rate cut and continues paying at their ‘usual’ repayment level, the extra $197 per month would eventually save them approximately $89,962 plus six years and nine months off their loan.

“All borrowers should take note: if your lender hasn’t passed on the vast majority of the 400 basis points cash rate decrease we’ve experienced since September 2008 then research your mortgage options right now. There is a wide range of attractive lenders and loan products available, and switching loans could save you money,” said Ms Sheppard.

“If you are looking to take out a mortgage, you will be happy to know mortgage rates are the lowest they’ve been in several years. Again, do your research so you find the loan that best suits your financial needs and lifestyle”.

The next RBA meeting is scheduled for 3 March.

Mortgage Choice Press Release

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