Fuel your deposit with petrol savings
Thursday, 19 February 2015
Low petrol prices and February’s official interest rate cut have both provided some much needed breathing space for household budgets.
The Reserve Bank of Australia’s cut earlier this month means the official cash rate now sits at a record low, and petrol is the cheapest it has been since 2009 (Sydney Morning Herald, 3 February, 2015).
In real terms, households could be saving between $50 -100 per fortnight on petrol, while on a $300,000 mortgage, the interest rate cut roughly translates to a saving of around $45 a month.
While there are clear benefits for households with a mortgage, there are also some potential advantages for those trying to break into the housing market.
The key benefit of an official rate cut for home buyers is it generally results in lower home loan repayment amounts, which effectively makes the purchase more affordable. So an interest rate cut may provide the boost needed to help a home buyer make the transition into ownership.
However, it’s important to remember that lower repayments brought about through interest rate cuts can be a false positive, because at some time in the future, interest rates will rise and so too will repayments.
This could provide challenges for home buyers that have overstretched their budget, so it’s vital that home buyers consider this scenario upfront and take action accordingly.
One way to do this is to build a buffer into your finances to allow for a significant rise in interest rates. Alternatively, you could take a fixed rate loan which means you are ‘locked in’ to a set interest rate for a certain number of years and won’t be impacted by rising interest rates during that time. Another option is to consider going with a lender such as HomeStart Finance, that offers a repayment safeguard so that changes in interest rates typically affect the loan term instead of loan repayments.
The other potential risk of lower interest rates for first home buyers is it may encourage investors to flood the market, which in turn could push up property prices, making it harder for those trying to buy their first home.
It is for this reason that the real positive in the current economic environment is lower petrol prices. Ratings agency Fitch recently calculated that the fall in petrol prices has been better for households than an official interest rate cut would be, particularly those with a low to average home loan amount (ABC News, 30 January, 2015).
For home buyers who don’t already have a mortgage, the fall in petrol prices is an opportunity to fast-track your deposit savings to get you into your own home sooner.
Upfront costs remain one of the largest barriers to home ownership, and having the discipline to save the money you would normally spend on petrol could provide much needed help in meeting these costs. When combined with a low deposit home loan product, for which you may only need a 3% deposit, it could mean getting into your home much sooner than planned.
Just as interest rates may rise, volatility in world oil prices means petrol prices may also rise at any time in the future. That’s why it is essential to make the savings count while you can and instill the self-control to put the money towards your home ownership goal rather than seeing it as additional spending money.