Variable Interest Rate Decrease

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As you are aware, on October 3rd the Reserve Bank of Australia announced that it would be acting to lower the cash rate by 25 bps (0.25%).  All major and "second tier" lenders have since announced reductions to their standard variable rates in the range 0.17% to 0.25%.  For prospective property purchasers this will have several effects:

  1. It means that borrowing costs will be approximately 3% lower

  2. For many it will also increase your borrowing capacity.  However, I generally counsel that borrowers should structure their maximum borrowings based on their income, their normal or anticipated future living expenses, and loan servicing costs at longer termrates.  

  3. It may have the consequence of bringing more buyers into the property market which in turn could lead to an increase in house prices in some areas.  After all, one of the reasons behind the RBA's move is to stimulate the economy in interest rate sensitive sectors.

Interest Rate Outlook

There is a 50% chance that the RBA will lower the cash rate by a further 0.25% in November, with the other possibility being that it may hold off until February next year.  The major determinant of this could be the CPI figure released at the end of October.  Longer term fixed interest rates continue to fall with most lenders offering 4 and 5 year fixed rates at less than 6% pa; in most cases this is lower than their current discount variable rate.  This is a strong demonstration that money markets have formed the view that variable interest rates will remain at the current level, or lower, for some considerable time.


If you would like some more information about any of the above, please call me and I will be happy to assist.

NAB May Economic Update

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The National Australia Bank issued its May Economic Update last week.  Key points are:

  1. The global economy has been hit by several shocks since mid 2011:  the economic slowdown in the Euro zone, monetary tightening across emerging market economies and increased uncertainty, volatility and risk aversion in financial markets.
  2. Australian businesses remain confident that business activity will pick up in the near term.  Mining continues to outperform other sectors with manufacturing conditions remaining depressed.
  3. Non-rural commodity prices have declined with concerns that slower growth in emerging economies such as China will lead to lower demand.
  4. A fall in the overall unemployment rate from 5.2% to 4.9% masks some underlying weaknesses.  Most of the growth is in part time jobs while the participation rate is back down to levels of 2 years ago.
  5. Conditions in the retail sector remain weak.  Heavy discounting is the major factor in propping up levels of sales.
  6. Based on the current state of the economy further easing in interest rates is expected with another RBA induced cut of 25 bps anticipated in August.

 In these relatively uncertain times we are fortunate to be living in a country that is well positioned to weather the global economic storm.  Nonetheless, it is advisable to take a measured approach to the management of your finances.  If you have a non deductible home loan, this is another great opportunity to accelerate your repayments to reduce the term of your loan and build in a buffer against any possible short term financial setbacks that may come your way.

It is also an opportune time to reconsider your risk management.  Mortgage protection cover can mitigate your financial risk due to illness, injury, death or even involuntary unemployment.  You could also look at reducing your interest rate risk.  Fixed rates are presently at relatively attractive levels;  for example, many lenders offering 3 year fixed rates in the range 5.71% pa to 6.14% pa.