The Reserve Bank of Australia recently cut its cash rate to 0.75% for the first time in an effort to breathe life back into a stagnating economy. This is the third time the RBA has lowered rates since June.
Their decision has far-reaching effects on everyone in the country, whether you have a mortgage or not. Find out more about what this means for you, your finances, and the general economy.
Before diving into how cash rates can affect you, let’s first understand what it is.
The cash rate refers to the rate of interest charged by the central bank for short-term loans between commercial banks.
The Reserve Bank of Australia is tasked with adjusting the rate based on the overall market conditions. Due to the rising unemployment in the country, the RBA is hoping the new interest rate will have a strong ripple effect on everything from wages to the strength of the Australian dollar.
However, just because the Central Bank lowered its rates doesn’t mean that all lenders are required to lower their rates in turn. Some will pass on the full benefits immediately, while others may wait a while to gauge the economy’s and their competitors’ response.
Lenders are allowed to pass on only a portion of the RBA’s tax cuts, and their terms can vary depending on everything from their clientele to their location.
The cash rate can affect the terms of your loan, the money in your savings account, and your future financial plans. If you’re a business owner, it can also affect your exchange rates.
Lower interest rates aren’t usually the go-to solution for the RBA. In fact, officials were hesitant to slash interest rates for fear it would create a housing bubble. It also actively penalises savers who want to maximise their returns.
Here are the specifics of how the cash rate affects different situations, and how you can best prepare for the immediate future.
The RBA is hoping that borrowers will start spending. The more money flowing into the economy, the more likely it is that the country will begin to recover. When interest rates are low, it encourages business owners, investors, and everyday citizens to take advantage of their savings.
For instance, let’s say you were thinking about making a few renovations on your home, but the interest rates on the loans you were offered were simply too high. Now that the RBA’s cash rate is less than 1%, you’re more likely to get a more reasonable deal on your loan. To complete the renovations, you’ll need to hire contractors and a handyman, thus creating jobs and moving more money through the economy.
Commbank is Australia’s largest home lender and the first to offer more than half the cut to its customers after the reduction. This reduced the mortgage payments for many of its borrowers, leaving additional room for growth. Other banks have followed with their own reductions.
If you have a mortgage, you’re only affected if you have a variable rate. You’ll have to wait until the end of your fixed-rate loan period if you want to take advantage of the lower cash rate.
If you do currently have a variable rate, now is a good time to research the terms of your loan. You may be able to negotiate a better deal with your lender or switch to a different institution with more reasonable terms.
If you’re on a fixed rate, any change to the cash rate won’t affect you. This means you won’t benefit from the cash rate drops.
Read further: Are You on a Fixed Rate and Not Happy with It?
Interest cuts are across the board — meaning the cuts affect everyone. Those who borrowed are charged less interest, and those who save will earn less interest.
Again, not all institutions are lowering interest rates, so you may not be affected. You should first check on whether the interest rate has dropped on your account before researching other rates.
No matter how low the RBA goes, there are still good deals to be had. If you have a term deposit, your rates won’t be affected until the deposit matures.
As cash rates fall, negative rates look more and more reasonable to officials. The RBA has commented that while they think it’s unlikely this will happen in Australia, they haven’t ruled it out as a possibility.
Understanding interest rates in different countries can help put each percentage into context. Countries like Japan, Sweden, and Switzerland all have interest rates below 0%, compared to 4% – 6% in countries like India and China. The US, Canada, and Norway are between 1% – 2%, with the UK and New Zealand falling under 1% (just like Australia).
Similar to cuts under 1%, mortgage rates under 0% will help borrowers and hurt savers. For instance, if the RBA lowered the rate to –1%, a borrower would make $1 for every $100 worth of a loan. Those with a savings account will lose $1 for every $100 they save.
Too many borrowers in the country fail to grasp how the structure of their loan truly impacts their bottom line.
Our advisors can help you handle the cash rate cuts, and how to plan for potential changes in the future. Get in touch today.
Disclaimer: This is general information only and should not be taken as financial advice. Please speak to a Shore financial planning professional before making a decision on your home loan.