Mortgage rates as low as they have been in many years

Prior to the early 1980s a borrower applying for a mortgage would have no option but to apply to their local bank branch manager for that mortgage. At this time in the mortgage industry the banking branch network was wide and serviced many communities throughout Australia.

A mortgage in the 70s was pretty simple in its structure. As a general rule a mortgage was always a standard variable rate principal and interest mortgage. If you were an investor there were private clients who would give you a mortgage on a 3 or 5 year interest only basis. The banks were not in the investor mortgage segment as aggressively as they were in the home mortgage market. Borrowers looked elsewhere for their investment mortgage because the banks charged higher interest rates on a mortgage that was for investment purposes. Even today it is incredulous that banks can charge much higher rates to small business even though they have a mortgage over the business person’s home or other property. The risk on the “business’ mortgage is no greater than for a mortgage where the purpose is to purchase property. At the end of the day the mortgage is secured by property and as such there should be little if any difference between the interest rate on a home mortgage as opposed to the interest on an investment or business mortgage.

In the early 1980s the government had imposed a cap or ceiling on the interest rate a lender could charge a borrower on its mortgage. Many mortgage rates were capped at 13.5% p.a. This seems an incredibly high interest rate when compared to what is on offer with mortgage rates today but during the 1980s interest rates on a first mortgage escalated to over 17.5% p.a. It is amazing that today mortgage rates for first home buyers have dropped to below 5% p.a. There have even been some mortgage rate specials as low as 2.99% p.a. variable.

In the USA the official rates are down to 0.25%. In Australia our Official Cash Rate is at 3.25% p.a. the lowest it has been since 1964! Governments are hoping that these low rates governments will translate into lower mortgage rates and rates for business as well. The lower mortgage rates will hopefully free up the cash flow of many mortgage borrowers with the result that they will spend more on consumable items. This spending is needed in the current dire economic climate because without the demand for goods, factories and manufacturers close down and unemployment rates increase.

Mortgage rates have an important role to play in the economy. When mortgage rates are high, people tighten their belts and do not spend – inflation is kept in check. When mortgage rates are low, people spend more and the economy is stimulated, people are kept in work.

In Australia we have seen fixed mortgage rates increase recently (June 2009) and this is because the banks are endeavouring to capture higher margin (read greater profits) through their fixed rate lending. Nevertheless it makes sense for borrowers to fix their mortgage rates in that fixed mortgage rates are still low by comparison to where they have been over the past few years. The lenders are happy and for the short term at least so are borrowers.