Following the Reserve Bank decision last Tuesday to lower the Cash Rate by 0.25% to 2.25% we reflect on some implications for potential property purchasers.
One consequence is to make it more advantageous to accelerate purchase decisions to get the benefit of lower interest rates in the early part of the loan life. The next move in interest rates is likely to be up, so we would advise purchasers to factor higher interest rates into budgets – if possible consider paying pay a higher repayment based on “normal rates” to reduce principal faster. A popular option is to take out a fixed rate mortgage.
For example at 5.51 % (the average standard variable rate in December 2014 – source Australian Bankers Association) over 25 years the monthly repayment is $6.15 per $1,000 of purchase price, equivalent to $3,073 per month for a mortgage of $500,000 .
At 7.3 % (the average rate over the last 20 years) the monthly repayment is $7.26 per $1,000 of purchase price, equivalent to $3,630 per month for a mortgage of $500,000.