RBA Slashes Rates by 100 Basis Points, Government $42 Bil Package

The good news is that the RBA has slashed interest rates by 100 Basis Points to a new modern era low of 3.25% – the lowest since 1964. So what does this mean for the average Australian ? Well, the good news is that on a 30-year typical $300K homeloan, a $170 bucks a month will be reduced over the entire life of the loan. This will amount to around a saving of $61K over the life of the loan.

Of course my advice has always been not to reduce your fortnightly interest repayments. Keep them at your current level and you will slash off around 5 years over the course of your home loan. Less on interest, more in your pocket.

Yep, this is the simplest recommendation that anyone can provide when interest rates decrease – don’t go out and spend this interest rate differential – “force save it” by keeping your homeloan and/or other loan repayments high. The higher the better really.

The other massive news today was that the Rudd Government is putting an extra $42 Billion into the economy – dubbed the “2nd Stimulus Package”. This means that most people will get another $950 “bonus payment” in March 2009 if you earn less than $100K. Personally, I completely disagree with lump sum payments by the Government – they do not work. In this economy, people are not going out to spend this additional cash like the Government wants them too – times are tough, the job market is shrinking which means that Australian deposits are increasing as people become resistant to overspending. I think that most people are going to save this money, put it directly on the home loan repayments or reduce their debt (i.e. such as credit cards or other miscellaneous debt).

A more effective distribution of money to Australians in this earnings bracket is via a staged approach that limits the payments that are provided to Australians. “Bulk Payments” didn’t work in December 2008 – with Australian Bureau of Statistics providing data which suggests most people used the December payment on savings or reducing existing debt. Of course, everyone loves a bulk payment – I just don’t think its going to provide the “kick start injection” that the Government thinks it is going to.

My thoughts on this payment is to save this money and use it as a liquidity buffer so you can draw on cash if you need – don’t spend it. Pay off existing debt and pretend that the payment was just a “bonus” that you needed to reduce debt. The more you can reduce your debt in these times the better.

Other highlights of the day include:

• Total government stimulus now at $88.7 Billion.
• Injection of the “2nd Package” is $42 Billion.
• New Package should support 90K of jobs.
• Government will ease discretionary spending to 2% to reduce the overall interest payments.
• Budget deficit will hit $22.5 Billion for the year to June 30.
• Low and Middle Income earners to receive another $950 from the ATO.

Drop a comment on your thoughts below.