R e s e r v e B a n k
The workings of the Reserve
Bank o Australia (RBA)can appear somewhatmysterious. But with thepower to raise and lowerthe country’s ofcialinterest rates, the RBAhas an enormous impacton what we pay eachweek or our mortgage.
The RBA controls the ocial cashinterest rate, which determines theinterest rate that the RBA charges whenit lends money to the banks or otherlenders. While the rates that lenderscharge are infuenced by this cash rate,the decision o what rate they pass onto consumers is also infuenced by theirown prot margins and the ratescharged by other sources o unds theymight use. The ocial cash rate is a mechanismthat the RBA oten uses to controlinfation, which it preers to keep withina target range o 2 percent to 3percent. By increasing the cash rate, itincreases the rates charged bymortgage lenders, putting the brakeson the ability o households to spendmoney on other goods. This has theimpact o driving infation down. According to the nancialcommentator and chie executive o theaccounting rm accountantsRus, Adrian Ratery, this was thegoal o the RBA in the rsthal o 2008.“In the rst hal o last yearthe infation rate was gettingout o this target range, dueto the higher oil prices whichwere eeding into the priceso household items,” Raterysays. “As a result the RBAraised rates to try and contain infationinto its target.”
The RBA can also encourage spending
by reducing its cash rate, provided thatlenders pass the lower rate along toconsumers by reducing their ownmortgage rates. Ratery says the globalnancial crisis led the RBA to drop ratesto encourage spending, in an eort toprevent the economy rom stalling.Ratery says that when the RBAchanges the cash rate, lenders normallychange the interest rates they chargeon their home loans, credit card and
business loans. But this is not mandatory.
“Lenders may also change theirinterest rates even i the RBA has notchanged the cash rate,” Ratery says.“This is because the unds they lend outas loans come rom various sources. I the cost o money rom those othersources changes they will generallypass that change onto your loan.”
The patter o tiny eet is a source o joy and your home loan lender may join the celebrations, oering maternity leave rom the mortgage.
Australia has been experiencing something o a baby boom lately, and orcouples with a mortgage, it’s good to know that many lenders oer a ‘pregnancypause’ – a eature worth looking or when selecting a home loan.
How it works
A pregnancy pause can work in several dierent ways,either oering a ‘repayment holiday’, meaning loanrepayments are suspended or a set period (usually threemonths); or you may be able to reduce the loan payments,oten by hal, or up to six months.
The downside
For new amilies, taking maternity leave romthe mortgage rees up valuable cash but it cancome at a price. The loan repayments, onceresumed, may be increased to ensure theloan is paid o within the original term. Alternately, the term may be extended. Bothare contingencies which new parents should considerwhen their thoughts turn to bibs, bottle and bootees.
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the purchase o an existing home or$21,000 or new constructions. At thesame time, investors are beingattracted back to property by lowinterest rates and high rents. Rainewarns, “Investors are sure to ndthemselves shoulder-to-shoulder atauctions with cashed up rst timers.”
Protecting yoursel againstredundancy
While the threat o rising unemployment
shouldn’t be overlooked, a survey byING shows an unexpected degree o condence in job security, with 61% o respondents believing they won’t beimpacted by job losses.ING Australia’s Gerard Kerr says,“Whether this view on job securitycontinues through 2009 remains to beseen. Although this optimism is a greatattribute, it becomes a concern i people don’t have a plan in place to
protect themselves i they lose their job.”
Given the present economicuncertainty, it makes sense to developa back-up plan, preerably ocusing ondebt reduction and building a pool o savings. Revisiting your householdbudget is a useul way to identiy areaswhere cutbacks can be made to reeup spare cash. Take a look at websiteslike www.understandingmoney.gov.au,which eatures a budget planner thatcan be downloaded ree o charge.For workers who do receive thedreaded call into the bosses oce, it’svital to think about how you’ll manageregular commitments like themortgage, bearing in mind that aredundancy payout may need tostretch or a long period i it takes timeto land another job. The MFAA’s Phil Naylor says, “I yound that the current economicsituation is over-extending yourbudget, we urge you to seek mortgageadvice. The worst thing a personstruggling to repay their mortgagecan do is stick their head in thesand and cross their ngers”.He adds, “I you or your partner loseyour job, it is important to let yourlender or broker know. The trick is toact quickly. The earlier you seek help,the more likely you are to have apositive resolution.”
Sources: ING Investor Dashboard Survey,December 2008; MFAA Survey / BankwestHome Finance Index.
Reserve Bank of Australia
Maternity leave from the mortgage
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