As predicted, the overnight rate has been lowered today by 0.25% taking it to a new low level of 0.5%. What impact does it have over us?
Firstly, it’s another reflection of a the recession we all experience: higher rates of un employment, more and more small and medium businesses closing down and difficulty to find a job.
Secondly, it may have an impact on our mortgage payment, yet everything depends on how the banks will respond and if they choose to follow.
Last time the banks adopted only a partial decrease to their Prime rate and lowered it by 0.15% instead of the 0.25% implied.
But the most important implications is for those who are now debating whether to take variable rate or fixed. Banks always encourage their clients to take fixed rate mortgages, because “Prime will go up soon”, resulting in much higher monthly payments. For the last few years we see that Prime does not tend to go higher, it’s direction is the other way around. Today is another support to Prime keeping low.
If that’s the case, why do banks advise us to take the more expensive choice?
Probably because it buys them stability and much more profit. But most important, it hooks you with a devastating penalty that is 3 to 10 times higher than with the variable rate options. This penalty makes sure you’ll stay with them for the full term, disabling you from responding to changes in the market where you are unable to save money furthermore.
Variable rate is today’s safest and cheapest choice, if you can be qualified for it…