RBA Rate to hold again at 1.5

RBA Rate to hold again at 1.5

The RBA have continued a seven-month streak and left interest rates unchanged at 1.5 per cent at the March 2017 meeting.

There are several factors which the RBA considers when it sets interest rates, such as the labour market and economic growth.

Subdued growth in wages (at a record low level of 1.8 per cent in the December quarter) means that inflation is expected to remain low for some time. The RBA keeping rates low suggest the Australian economy isn’t growing as fast as it could be, which may undermine our prosperity over time.

Jobs growth too has slowed. While the unemployment rate in Australia sat at a relatively low level of 5.7 per cent in January 2017, total employment growth over the year to January was just 0.8 per cent, which was less than half the average growth rate over the past 20 years (1.8 per cent).

That’s a bad sign for consumers who are far more likely to spend money if their wages are growing strongly and there are good prospects for employment.

Why does the RBA set these rates?

The RBA sets interest rates to keep inflation within a 2per cent to 3per cent band. Inflation is sitting well below that, at just 1.5per cent in the December quarter of 2016. This gives the RBA scope to keep interest rates lower for longer.

Another reason the RBA has kept the 1.5 per cent rate is to push the Australian dollar lower as this makes Australian exports cheaper and therefore more attractive to offshore buyers. This helps to boost economic activity which has been growing at below trend rates given the mining downturn.

Should we raise interest rates?

Household debt is siting at around record levels and property markets have been surging ahead in Sydney and Melbourne. Auction clearance rates are back over 80 per cent and the low level of property listings has pushed dwelling prices higher. Housing is now extremely unaffordable for many people in those two big cities.

The RBA doesn’t want to see a property bubble, but that’s exactly what it’s looking like in Sydney and Melbourne with both markets dangerously overvalued, especially Sydney’s.

The RBA is keen not to fuel the bubble further through lower interest rates. This suggests the RBA could raise interest rates sometime later this year or in 2018.

Having said that, elsewhere in Australia, house prices have grow more modestly and they are falling in Perth and Darwin given the mining downturn, factors which might hold the RBA’s hand from raising rates.

Other factors suggest the RBA may not need to raise rates to quell property demand as the banks are doing it anyway to preserve their interest rate margins and profits.

The Australian banks have been moving out of step with the RBA and raising interest rates on home loans for investors and, more recently, owner-occupiers. Banks have also tightened lending criteria such as loan-to-value ratio (LVR) on investment loans after the Australian Prudential Regulation Authority’s introduced supervisory measures in 2015 to cap the growth of investor lending, which are still restraining lending today. Even if official rates stay on hold Aussie banks are still raising rates.

Fixed interest rates on home loans have also been rising with the expectation of renewed global economic growth after Donald Trump’s presidential victory in the US, which has pushed up bond yields, off which fixed mortgages are priced.

What else influenced the decision?

Other factors have also impacted the Reserve Bank’s decision to hold the cash rate.  

Commodity prices have improved significantly from recent lows but this follows very substantial declines over the past couple of years.

Exports of many of Australia’s key commodities are soaring. Higher interest rates would push up the Australian dollar and make our exports more expensive, which would undermine an export-led economic recovery.

The RBA expects and wants to see Australian economic growth back at around 3 per cent over the next couple of years. It has been well below that in recent times. Consumer spending and retail sales are expected to pick up from recent outcomes but to remain moderate. Some further pick-up in non-mining business investment is also expected. Higher interest rates would put this recovery at risk.

Other considerations include the strength of the global economy, what’s happening in the US economy and China, and the level of stock markets around the globe and locally. While US stocks have been hitting record highs in recent times, Australian share prices aren’t so exuberant, which is another factor suggesting that rates will remain on hold. Also, US interest rates look like they could be rising soon which the RBA will be considering.

For March 2017, RBA cash rates are on hold. But their next direction, whether up or down, is impossible to predict right now.

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Interest Rate

Your current home loan interest rate. To accurately calculate how much you could save, an accurate interest figure is required. If you are not certain, check your bank statement or log into your mortgage account.

How can I get ANZ home loan pre-approval?

Shopping for a new home is an exciting experience and getting a pre-approval on the loan may give you the peace of mind that you are looking at properties within your budget. 

At the time of applying for the ANZ Bank home loan pre-approval, you will be required to provide proof of employment and income, along with records of your savings and debts.

An ANZ home loan pre-approval time frame is usually up to three months. However, being pre-approved doesn’t necessarily mean you will get your home loan. Other factors could lead to your home loan application being rejected, even with a prior pre-approval. Some factors include the property evaluation not meeting the bank’s criteria or a change in your financial circumstances.

You can make an application for ANZ home loan pre-approval online or call on 1800100641 Mon-Fri 8.00 am to 8.00 pm (AEST).

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What is the best interest rate for a mortgage?

The fastest way to find out what the lowest interest rates on the market are is to use a comparison website.

While a low interest rate is highly preferable, it is not the only factor that will determine whether a particular loan is right for you.

Loans with low interest rates can often include hidden catches, such as high fees or a period of low rates which jumps up after the introductory period has ended.

To work out the best value for money, have a look at a loan’s comparison rate and read the fine print to get across all the fees and charges that you could be theoretically charged over the life of the loan.

What happens to my home loan when interest rates rise?

If you are on a variable rate home loan, every so often your rate will be subject to increases and decreases. Rate changes are determined by your lender, not the Reserve Bank of Australia, however often when the RBA changes the cash rate, a number of banks will follow suit, at least to some extent. You can use RateCity cash rate to check how the latest interest rate change affected your mortgage interest rate.

When your rate rises, you will be required to pay your bank more each month in mortgage repayments. Similarly, if your interest rate is cut, then your monthly repayments will decrease. Your lender will notify you of what your new repayments will be, although you can do the calculations yourself, and compare other home loan rates using our mortgage calculator.

There is no way of conclusively predicting when interest rates will go up or down on home loans so if you prefer a more stable approach consider opting for a fixed rate loan.

How much deposit will I need to buy a house?

A deposit of 20 per cent or more is ideal as it’s typically the amount a lender sees as ‘safe’. Being a safe borrower is a good position to be in as you’ll have a range of lenders to pick from, with some likely to offer up a lower interest rate as a reward. Additionally, a deposit of over 20 per cent usually eliminates the need for lender’s mortgage insurance (LMI) which can add thousands to the cost of buying your home.

While you can get a loan with as little as 5 per cent deposit, it’s definitely not the most advisable way to enter the home loan market. Banks view people with low deposits as ‘high risk’ and often charge higher interest rates as a precaution. The smaller your deposit, the more you’ll also have to pay in LMI as it works on a sliding scale dependent on your deposit size.

What is the difference between fixed, variable and split rates?

Fixed rate

A fixed rate home loan is a loan where the interest rate is set for a certain amount of time, usually between one and 15 years. The advantage of a fixed rate is that you know exactly how much your repayments will be for the duration of the fixed term. There are some disadvantages to fixing that you need to be aware of. Some products won’t let you make extra repayments, or offer tools such as an offset account to help you reduce your interest, while others will charge a significant break fee if you decide to terminate the loan before the fixed period finishes.

Variable rate

A variable rate home loan is one where the interest rate can and will change over the course of your loan. The rate is determined by your lender, not the Reserve Bank of Australia, so while the cash rate might go down, your bank may decide not to follow suit, although they do broadly follow market conditions. One of the upsides of variable rates is that they are typically more flexible than their fixed rate counterparts which means that a lot of these products will let you make extra repayments and offer features such as offset accounts.

Split rates home loans

A split loan lets you fix a portion of your loan, and leave the remainder on a variable rate so you get a bet each way on fixed and variable rates. A split loan is a good option for someone who wants the peace of mind that regular repayments can provide but still wants to retain some of the additional features variable loans typically provide such as an offset account. Of course, with most things in life, split loans are still a trade-off. If the variable rate goes down, for example, the lower interest rates will only apply to the section that you didn’t fix.

What are the pros and cons of no-deposit home loans?

It’s no longer possible to get a no-deposit home loan in Australia. In some circumstances, you might be able to take out a mortgage with a 5 per cent deposit – but before you do so, it’s important to weigh up the pros and cons.

The big advantage of borrowing 95 per cent (also known as a 95 per cent home loan) is that you get to buy your property sooner. That may be particularly important if you plan to purchase in a rising market, where prices are increasing faster than you can accumulate savings.

But 95 per cent home loans also have disadvantages. First, the 95 per cent home loan market is relatively small, so you’ll have fewer options to choose from. Second, you’ll probably have to pay LMI (lender’s mortgage insurance). Third, you’ll probably be charged a higher interest rate. Fourth, the more you borrow, the more you’ll ultimately have to pay in interest. Fifth, if your property declines in value, your mortgage might end up being worth more than your home.

Savings over

Select a number of years to see how much money you can save with different home loans over time.

e.g. To see how much you could save in two years by switching mortgages,  set the slider to 2.

Does Australia have no cost refinancing?

No Cost Refinancing is an option available in the US where the lender or broker covers your switching costs, such as appraisal fees and settlement costs. Unfortunately, no cost refinancing isn’t available in Australia.

Can I change jobs while I am applying for a home loan?

Whether you’re a new borrower or you’re refinancing your home loan, many lenders require you to be in a permanent job with the same employer for at least 6 months before applying for a home loan. Different lenders have different requirements. 

If your work situation changes for any reason while you’re applying for a mortgage, this could reduce your chances of successfully completing the process. Contacting the lender as soon as you know your employment situation is changing may allow you to work something out. 

If I don't like my new lender after I refinance, can I go back to my previous lender?

If you wish to return to your previous lender after refinancing, you will have to go through the refinancing process again and pay a second set of discharge and upfront fees. 

Therefore, before you refinance, it’s important to weigh up the new prospective lender against your current lender in a number of areas, including fees, flexibility, customer service and interest rate.

Can I refinance if I have other products bundled with my home loan?

If your home loan was part of a package deal that included access to credit cards, transaction accounts or term deposits from the same lender, switching all of these over to a new lender can seem daunting. However, some lenders offer to manage part of this process for you as an incentive to refinance with them – contact your lender to learn more about what they offer.