Lower interest rates and increases in government grants have enticed more Australians, particularly first homebuyers, to purchase a residential property. The number of permits in January to build private sector houses rose for the first time since April 2008 despite total approvals to construct dwellings falling, official data showed.

But now the party’s officially over. According to leading economists interviewed on the ABC AM program last week, homebuyers can expect to be repaying around $130 extra per month on an average mortgage after the next few Reserve Bank of Australia board meetings. The RBA is widely tipped to raise its key interest cash rate by up to 75 basis points in a further attempt to wind back the Commonwealth stimulus and return interest rates to a normal level.

The central bank last raised interest rates earlier this month, and since then the country’s major commercial banks have announced increased profits. But now, there will be a bit more room to shop around for better rates. Treasurer Wayne Swan recently announced that the Federal Government is putting more money into non-bank lending to try to prop up competition in the mortgage markets.

Competition in the home loan market suffered in Australia over the last two years. Non-bank lenders Bluestone and RAMS Home Loans were two lenders to find themselves a victim of the global financial crisis, crippled by the higher cost of borrowing. When talk turned from subprime to “credit crunch”, there was no credit. Liquidity just dried up, leading – as governments around the world wind back stimulus packages – to higher mortgage rates. Higher rates, above movements in the RBA cash rate, are costs banks have to pass on to consumers to preserve their profitability. Australia’s RBA was the first central bank in the world to put up rates after the crisis passed Australia, at least.

Renewed competition in the marketplace may mean that you are able to shop around for better rates. You won’t be restricted to the big four banks, or banks at all, once the Commonwealth plan to stimulate non-bank lending kicks in. Still, a rate rise of two per cent would still leave variable home loan rates well below the 9.60 per cent peak seen at the time of the last Federal election. So if your wages haven’t dropped because of reduced hours, it’s a good time to increase payments to pay your mortgage off faster. And if you can find a home you can afford, it’s an idea to buy now whilst prices are somewhat lower than they were in 2007.

You’ve still got time under the first home buyer’s grant, even though it too is being wound back. Plenty of other people are taking the option: so many that banks are struggling to keep pace with an unexpected increase in applications from first-home buyers. Managing your mortgage properly may mean you buy fewer consumer goods in the short term whilst you attempt to manage your mortgage, but it means increased financial security in the long term.

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Category: Finances
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