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Timing your house purchase with fluctuating bank reserve interest

By Andrew Bell

Are you seeking to purchase a home, but have reservations about the potential interest you will have to pay? Here’s how the bank reserve may impact your decision on when to buy and what terms to look for.

How does the bank reserve affect the home loan market?

The Reserve Bank of Australia is responsible for monetary policy and regulates the formulation and implementation of any changes to it, including setting the interest rate on overnight loans in the money market. Other interest rates in the economy, such as those for home loans, are influenced by this overarching rate. This means home buyers and sellers often watch fluctuations in the bank reserve closely, trying to time their home purchase to take advantage of the lowest possible rate.

Interest fluctuations were not as bad as they once were

Inflation spun out of control in the ’70s and ’80s, peaking greater than 16% at one point. In the early ’90s, the Australian government set a 2-3% target rate for inflation, and fluctuations eventually minimised. Today, home buyers are affected by the back-and-forth of the market, but rarely is the effect significant enough to cause major disruption to their homeownership. That said, it can be smart to watch the short-term projections for interest rates and to hedge your bets against changes that could impact your home loan.

Home loan interest rate terms

Assuming you manage to buy a home when the interest rate is very low (and unlikely to dip any time soon), a fixed-rate mortgage may be your best option. This protects you from increases to that interest rate, and means your mortgage payment will be fairly predictable. However, if the interest rate is fluctuating consistently, you could miss out on it dipping even lower.

A variable interest rate follows the ups and downs of the market. This means you could be paying one moderate interest rate one year, a higher rate the next, and a lower percentage three years down the road. The variable route can be risky, but may result in serious savings if there happens to be a significant and lengthy trough in interest rates.

One more option exists to help you alleviate some of the anxiety over trying to time your home purchase to fluctuations in bank reserve interest. A split interest rate allows you to provide some predictability with a fixed rate for part of your total mortgage, and a variable rate on the rest. This mitigates the risks you’d experience with a variable-rate mortgage without completely eliminating the chance to profit if the bank reserve’s rate drops favourably.

Ready to buy? Contact Ray White Surfers Paradise. Our team can help you find your dream home.

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