Well the Reserve Bank of Australia has today, 2nd December 2008 announced a reduction in interest rates by a further 1.00% or 100 basis points which now makes the cash rate to be 4.25%.
It will be very interesting to see if the Australian banks and Money Managers or originators will follow suit. I am seeing more clients now breaking their fixed rate loan which they had applied for early in the year to enable saving their interest cost. To break your fixed rate loan today if it has not expired will certainly trigger economic costs to the borrower. Economic cost is where the banks will change the borrower for early termination of the loan.
So is it worth breaking, well you will need to do the sums. Generally those that have a fixed rate and would like to break the loan to get a cheaper rate should work out the benefit of when you will recover the economic costs. Take the difference of interest rate and the savings in dollars and divide this with the cost to break your loan. For example, if your break cost is $5,000 and you have a fixed rate loan of $400,000 at 10.00% and the fixed rate is now 6.50%, this would be a savings of 3.50% of interest. Working on interest savings only, this will mean that you will save approximately $14,000 per year in interest or $1,166 per month in interest. With $1,166 per month, you will be in front with just over 4 months by breaking your loan. If the break cost is $10,000 then it will be just under 9 months.
So those of you with high interest rates which was locked early in the year, you should now speak with your mortgage broker and get them to find you the best rate. Alternatively, go to www.myhomeloansbroker.com.au and we will assign a mortgage broker to you.
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