A perfect storm has meant banks are lowering their interest rates to try and attract new customers. COVID-19, the beginnings of a recession and increased competition make this a buyers market.
However, it’s no help right now to people are suffering from job losses, employment uncertainty and increased financial pressures. Many people have deferred payments on their mortgages, as they struggle to afford their regular payments. In the USA alone, 20.3 million jobs have been cut. This is the single biggest fall since the Great Depression, and the effects are being felt world-wide.
Unfortunately, these losses are hitting younger people the hardest, those couples just setting up their new homes, or starting to save for their future home deposit.
But for those with an existing home, substantial nest egg, ongoing full employment, or are in a solid financial position, banks are fighting for their attention.
What are the financial mechanisms being used to fight recession?
Worldwide, reserve banks are slashing their interest rates in a bid to keep a COVID-19 depression at bay. There’s only a certain amount that policymakers can do, short of re-employing everyone who has lost their jobs over the past few months.
Cutting interest rates are a commonly used tool to encourage people to take out loans and buy homes or other investments. The USA has slashed its interest rate reductions from 1.75% to 0.25% over the past few months. Canada, from 1. 75% to 0.75% and the UK from 0.75% to .25%.
Banks are buying assets in a bid to increase bond prices and lower interest rates. The EU is investing €750 billion in their bond-buying program, the USA $700 billion. But, it’s unsure what this means for consumers, as countries start to run out of funds to manage this with, or tools to use in this global pandemic.
What’s going to happen in the future?
There’s a lot of uncertainty right now. There are worries that supply chains for food and other essential items will be disrupted. The stress of the pandemic and a looming second wave throws more doubt into the equation.
The likelihood of negative interest rates looks increasingly like an option, a way of bolstering the economy in an uncertain time.
What does this mean for future home buyers?
Right now, banks are fighting it out for customers, with mortgage interest rates dropping. If you are looking for a new home, have a sizeable deposit and a steady income that’s certain over the next 12 months, you are in a strong position.
Buying a home in a slow market with a low interest rate, means you’ll be making significant savings now and in the future. It could also be a good time to secure a good deal on home insurance.
A $300,000 home loan with a 5% interest rate, repaid over 30 years, means you’ll pay $579,769 over the lifetime of the loan. That same mortgage at 3% interest means the entire price is $455,332. 1.5% interest, $372,729. That is a substantial amount of money to save, if you have the ability to do so.
How to take advantage of this
If you are in the market for a new home, continue looking. Albeit from a socially-distant place. And start approaching banks. The power lies with you right now. Compare what banks are offering, and then see if you can play them off against each other.
Ask your mortgage broker or bank manager to lower their rate or waive fees. If one bank is offering a lower rate, tell your bank about it. Even .1% difference can save you thousands over the course of your loan.
If you are ending a fixed term mortgage or currently on floating rates, it’s time to look at re-fixing it at a lower rate. There is some debate if it’s worth waiting longer and seeing if rates will continue to drop. However, there’s only so far mortgage rates can drop. It might be worth locking in a 2.5% or 3% mortgage now, while you still can. This could save you $50 to $70 each repayment, which is a considerable sum of money.
If you are struggling to pay your mortgage on a lower income and an interest rate cut won’t be enough to resolve this, speak to your bank. They may help you lower repayments, they may offer you a mortgage holiday, and they may even be able to help you restructure your payments to make it more affordable.
This is definitely a great time to look at your mortgage and see if you can reconfigure and save some serious money. Consider the benefit of breaking a mortgage agreement and starting again at a lower rate, even with penalties, it could still save you a lot of money.