Recession now apparent – was the rate cut enough?

Home loan borrowers could see standard variable interest rates of around 6.5 per cent within six months, according to banking information provider

The rapid decline in economic growth last quarter revealed today makes certain further rate cuts sooner rather than later, said Chris Gosselin, chief executive of InfoChoice, publisher of BankChoice. “And with substantial cuts to rates comes the opportunity for borrowers to make great repayment inroads into their home loans,” he said.

“The RBA's latest cut announced today leaves official rates at 5.5 per cent but we may well see official rates approaching their 4.75 per cent lowpoint of recent decades by the September quarter of 2001.”

December quarter contraction in the economy raises doubts over whether the Reserve Bank's 0.25 per cent cut in interest rates was enough, Mr Gosselin said.

“With the latest economic indicators on employment and housing suggesting the first quarter of 2001 is as bad as the previous quarter, it appears we may well record two successive quarters of negative growth which would put Australia officially in recession.”

BankChoice data shows the margin between the official RBA rate and the banks' standard variables rates has been a consistent 1.75 to 1.80 percentage points over the last two years. If official rates fall as predicted, this would put the standard home loan rate at around 6.5 per cent and the best discounted, low-frills rates below 6 per cent.

For home loan borrowers, today's 0.25 percentage point drop in mortgage rates will mean a saving of around $25 per month on a variable rate loan of $150,000.

However, borrowers who can maintain their loan repayments at January's level, before the February and March rate cuts, will enjoy substantial savings in interest payments and pay their loan off quicker. If rates stayed the same, borrowers would save up to $54,000 in interest and cut their loan term by almost four years.

A recent online survey at BankChoice revealed that 79 per cent of borrowers would continue to pay at the old rate to pay their loan off quicker and forego the opportunity to have more money in their pockets at the end of the month.

For more information:
Chris Gosselin
Chief Executive Officer
InfoChoice Limited
PH: [02] 9247 6788
MOBILE: [0411] 537 830

Lisa Montgomery
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