The Reserve bank finally dropped interest rates this month, for the first time in around 18 months.
This put paid to all that speculation over the last year or so that the only way must be up for the historically low rates.
I must confess that I was among those warning that low rates would not last for ever and I was even concerned that some young buyers who had only been in the market for the past year or two might think that five per cent or lower interest on home loan repayments was actually the norm!
While we may all bemoan our parents for paying below $200,000 for the family home back in the ‘good old days’, it is also important to remember that not only were wages a lot lower, but interest on home loans was much higher and even reached 17 per cent for an average standard variable loan during the 1989/90 financial year.
Imagine paying off one of today’s million-dollar properties with that kind of interest.
Anyway, the average variable rate loan over the last 50 years or so sits around 7.3 per cent, according to RBA statistics, so I thought it must surely just be a matter of time before we start tracking upwards towards that figure.
But no, suddenly economists started talking about a rate reduction and not that long after tongues started wagging, our central bank took action.
It seems that no matter how inflated house markets in some areas have become, economic confidence is simply not up to scratch.
And it’s no wonder, with household incomes set to fall in real terms for the third year in a row, something that has not happened since the great depression.
Unemployment looms as a concern and people are still refusing to retail; perhaps because the GFC permanently changed their mindset towards credit, which I think is a good thing.
But back to the falling rates.
Major banks were quick to pass on most or all of the 25 basis point cut, which equals a quarter of a per cent.
Now, a quarter of a per cent doesn’t sound like much, so what does it actually mean for your home loan?
If you’re paying off an average mortgage of around $450,000, the rate cut will make you around $70 a month better off.
This is an extra $840 a year in the pocket.
That’s not bad, but if you look at a 30 year loan period, compound interest means you’ll save almost $25,000 and pay off your loan up to a year sooner.
If you live in a capital city, like the majority of the population, you are probably wondering who the hell has a $450,000 mortgage.
Your city home loan is probably a lot higher than average, so that quarter of a per cent means the savings are magnified again.
It’s enough to make you cheer a little bit harder for another rate cut on the first Tuesday of March, which, by the looks of things is firming as a real possibility.
Tim McIntyre is the senior real estate reporter for the Daily Telegraph and News.com.au. Over the past decade, he has attained widespread knowledge of Australia’s many unique property markets and is an authority on all things buying, selling and investing. His commentary appears every Saturday in the Daily Telegraph Real Estate lift out, as well as online at news.com.au.