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Lowest interest rate since The Beatles

Help!

The last time official interest rates were down this low, the cool generation of the time was debating whether The Beatles would ever be more popular than Elvis and Bob Menzies was the Prime Minister. We’re talking the early 1960s and while we have come a long way with modern banking with ATMs and online financial services, home loan borrowers have a whole lot more traps to worry about nowadays.

I want to hold your hand

To rely on a Beatles big hit of the ‘60s, ‘I want to hold your hand’ through some of the interest rate traps that could await anyone game enough to use the Rudd Government’s hand outs and the Reserve Bank’s interest rate cuts to buy a new home.

Hot on the heels of the Big Bank’s decision to cut the cash rate of interest from 4.25% to 3.25%, major banks quickly came out with new home loan rates. The standard variable home loan rate is now around 5.75% and considering only six months ago we were closer to 9.75%, this is an enormous boost to many borrowers’ bottom lines.

For someone with a $400,000 home loan, they have now been given back an extra $1000 a month which adds up to $12,000 a year. This will eventually spark a whole lot of interest in buying a home and will stop the recent fall in home prices.

The national drop was around 3.3% but this is only an average price for the whole country. Some areas have lost 10% or more, while some areas have had gains.

To buy or not to buy

The fear of recession and losing jobs will hold back some potential homebuyers and so for those keen to buy, you probably have a fair bit of this year to shop around and still find bargains.

However, as the low rates kick in, and they will go lower, and the economy starts to show the benefit of the Federal Government’s payments to 8.7 million workers, more people will turn up to auctions and house openings which will eventually cause home prices to rise.

Make enquiries

Given all of this, make sure you are ready to get the best deal on your home loan as well as your potential property.

Go to your bank and see what they will lend you and at what rate. Then go to a couple of mortgage brokers to see what they can offer. This will give you an idea of the rate variation out there.

Be cautious

But one BIG warning — ask the brokers and the bank the following question: “What will the comparison rate of interest be?”

By law they have to tell you but the ads I have seen often play them down while still providing the information.

The comparison rate starts with the advertised rate that gets you in, but it then adds in any extra charges or fees, which means the advertised rate can be a con job! The comparison rate is the actual rate you will pay. It is, effectively, the real or true rate but officialdom has a belief that the everyday Aussie understands the comparison rate. My surveying tells me that they are wrong!

Further rate cuts?

To the next question about fixing your home loan for the future and this is always a difficult challenge and fixers often can get it wrong, though it tends to be when rates are high that more mistakes are made.

The economic experts who watch the Reserve Bank think that there are more rate cuts to come and many expect the cash rate of interest will fall to 2%! It’s now at 3.25% and so there might be time for fixers to wait until rates hit the bottom.

On the other hand, many of these guesses on rates by the experts were made before the massive mini-budget giveaways. This big injection of money and potential demand could mean the Big Bank slows up its planned rate cuts.

Fixed or variable home loan?

So once again the fixers have a gamble on their hands. That said, my guess is we will see a few more cuts — insurance cuts if you like — because the global economy is so weak.

Given that, those going into a variable home loan should see if it’s not difficult or expensive to switch to a fixed rate in the future. Some cautious people take a cocktail loan, which is part-fixed and part-variable.

If you go into a fixed loan, or for that matter even for a variable loan, find out what it costs to close out your loan if you have a windfall or you simply want to switch in some years time.

Know your facts

Finally, with all big borrowing exercises make sure your job or source of income is secure. Also make sure you have insurance in case something goes wrong.

If you ask all of the hard questions before you sign on the dotted line, you won’t see your dream home dream end up in tears.

Published on: Tuesday, June 09, 2009

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