Review your mortgage - can you benefit from a 6.99% fixed rate

The Reserve Bank of Australia cut interest rates by a full 1%, the largest cut in official interest rates since 1992. The rate cut is a response to the deteriorating credit market and is a move that is aimed at reducing interest costs not only to the average Australian but also between the banks. Their unwillingness to lend to one another in response to the credit crisis domestically as well as the impact of this scenario being played out amongst international lenders has led to a further deterioration in the credit markets, resulting in further market falls.

With the prevailing credit conditions, our banks passed on 80% of this interest rate cut. A move criticized by borrowers looking to take full advantage of the cut. An interest rate reduction of 0.8% will still make a difference to many Australians struggling to meet their present mortgage and other finance commitments. It has been an extremely tough 12 months with rising interest rates, petrol prices and food costs.

Whilst a rate cut would normally allow borrowers to maintain their previous mortgage repayment amounts, it is more likely this time round that most borrowers will reduce their mortgage repayments in line with the 0.8% rate cut and put these precious dollars to work back in the family budget, meeting their daily living expenses. Living expenses continue to rise and whilst oil prices have come back significantly, petrol prices have come back only slightly. Whilst this may be blamed on the fall in the Australian dollar, the fact remains that motorists have benefited little from the fall in oil prices which have come back from $150 a barrel to below $70, whilst the Aussie dollar has come back from $0.97US to around $0.68US.

The real opportunity for borrowers is to revisit their personal loans, credit card debt and other loans to see if the repayments saved on their mortgages might be better spent on reducing other more expensive debt.

Over the weekend, the guaranteeing of Australian banking deposits has put some initial confidence back into the banking sector, placing most banking institutions on an equal footing in terms of raising capital to on lend to customers. This is likely to see some competitive interest rate pricing which is already coming through institutions such as Westpac, offering fixed loans at 6.99% p.a. down from over 9% p.a. Given the present market environment we may be unlikely to see rates go too much lower as this will depend on inflationary pressures and the response of our domestic market. With Governments overseas implementing similar initiatives, global markets may stabilize and this may see a moderating in the mood to move rates lower domestically.

We must not forget that inflationary pressures continue and whilst the economy may slow, the initial cut in the rate may not go as low as it did a number of years ago where variable rates where around 6% p.a. so fixed rates over three years of 6.99% pa may be quite attractive.