RBA Cuts Rates Again: How Low Can They Go?
The RBA has reduced the cash rate to a new record low of 0.50%, the first rate cut since October 2019. It’s not alone — rates are getting slashed across the world, due to the economic threat posed by the coronavirus outbreak. With Australia still in recovery from the bushfire crisis, many first-time home buyers and prospective homeowners are wondering how the rate cuts will impact them.
Here’s an in-depth overview of the March interest rate cut — and why now is a good time to buy or refinance a home.
How the Banks Have Responded to the Rate Cuts
Not only has the RBA reduced the cash rate to 0.5%, but it’s likely to reduce it once more by another 0.25% before it begins to introduce other methods, such as quantitative easing. This is a process where RBA increases the money supply in the system to stave off economic disaster.
As of this writing, a total of 35 banks and lenders have slashed their own interest rates following the RBA cut to support their customers and the economy:
- The big banks — Westpac, CBA, NAB, and ANZ — all responded by passing on the cut in full before the close of the day on 3 March 2020.
- Lenders like St George, Bank SA, Bank of Melbourne, Bank West, Macquarie, Suncorp, Newcastle Permanent, and ING have also passed on the full rate cut.
More lenders are soon to follow. All big four banks now offer their lowest variable rate under 3%. At Shore Financial, we ensure that we are always on top of the news. If you’d like to know if your bank has passed along the savings, don’t hesitate to message us below.
Effectively, what does this mean? Someone with a $1M mortgage would save $1,686 in interest a year.
The biggest savings would be for investors who are paying interest-only mortgages; there are now fixed rates under 3%.
Here’s an overview of the annual interest savings based on the size of the loan:
Good News for Home Loan Customers
For the average home buyer, this rate cut could potentially save hundreds or even thousands of dollars. The rate cut doesn’t just potentially lower monthly payments, but it can also increase average mortgage sizes.
Homebuyers who were previously on the fence, waiting for the right time and income to buy a home, may find that they now do qualify under these new interest rates. Those who are currently looking for a home may be able to upgrade the size of home they’re looking at (or may just want to pocket the monthly mortgage savings).
While there may also be another rate cut in the future, it’s unknown when (or really if) that rate cut may come. That makes now one of the best times to purchase a home, with interest rates at a historic low.
In the figure below, you can see that an individual with a $150,000 loan would save $21.45 per month, while an individual with a $650,000 loan will save nearly $100 per month.
These interest rate improvements aren’t just available for those who are buying a home. They’re available for those refinancing their mortgage as well. Those with higher interest rates may want to look into refinancing now at these low interest rates; they can save quite a lot over the life of their loan.
Bad News for Savers
Of course, it isn’t all good news. When the interest rates go down, interest rates on savings accounts go down as well. Savers and bank depositors are going to find their money earning almost nothing, and any money being deposited in the bank may not even be keeping up with inflation.
A low cash rate means that keeping money in a checking account or a savings account isn’t as useful. However, good options are still available for Aussies who are looking to secure their savings:
- Buy a property that will appreciate in value over time
- Look into non-major banks and neobanks
While there are other types of investments, they’re also particularly volatile because of the coronavirus. The overall stock market has fallen 20% so far in the wake of the coronavirus and is likely to fall farther, especially depending on how coronavirus ultimately affects the country.
Is It Time to Take a Look at Your Mortgage?
Let’s say you aren’t a first-time homebuyer but are instead a homeowner. It’s time to take a look at your mortgage. With interest rates so low, it’s the perfect time to refinance, and you could potentially be paying more than you need.
With today’s historically low interest rates and banks often offering cashback rebates of $2,000 to $4,000, refinancing could be the smartest financial move for you. Speak with an adviser at Shore Financial today to explore your options.
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.