This Tuesday afternoon (4 June), the RBA announced that after almost 3 years they were dropping the official cash rate by 0.25%! Reasons being, “to support employment growth and provide greater confidence that inflation will be consistent with [its] medium-term target”. This brings the cash rate to 1.25%, which is a new ‘historic low’.
On top of this, we are expecting another rate cut before the end of the calendar year!
Although the cash rate hasn’t moved in almost three years, lenders have been very active over this period. So, we have been ensuring clients (and people we speak to in general) that it’s important to realise that the cash rate itself isn’t the only deciding factor on your rate.
With speculation building that the outcome on Tuesday was going to be a rate cut, many lenders already started adjusting their rates in anticipation and preparing their media releases outlining what they would do. Several lenders immediately announced rate reductions across standard variable rates on their mortgages following the RBA announcement.
As of right now we have received the following announcements:
- ANZ – rate cut of .18 off their standard variable rates
- Bank of Melbourne – rate cut of .20 off all of their standard variable rates – except for investment interest only loans where they will see a 35-point reduction
- CBA – rate cut of .25 off their standard variable rates
- ING – rate cut of .25 off their standard variable rates
- Macquarie – rate cut of .25 off their standard variable rates
- NAB – rate cut of .25 off their standard variable rates
- Suncorp – rate cut of .20 off their standard home loan interest rates
- Westpac – rate cut of .20 off all their standard variable rates – except for investment interest only loans where they will see a 35-point reduction
- Virgin Money – rate cut of 0.22 off their standard variable rates
Now, you may be wondering what a .25 difference may mean for future home buyers, current home owners, or retirees?
Based on an owner-occupied home loan of $400k, with principal and interest repayments would have their monthly repayments reduced by approximately $62 per month, which equates $744 per year.
Cheaper rates mean cheaper interest on your outstanding loans, so obviously there is some cash flow benefit for those with loans, but what about beyond that?
Well, the cash rate impacts your returns on savings accounts, term deposits, etc. So, whilst a lower repayment is good if you have debt, what if you don’t have any debt? What if you’re saving to purchase your first property? What if you’re a pensioner?
The rate cut could pose quite a predicament for pensioners and home buyers. If you’re keeping money in cash, like high interest savings accounts then it may take a hit and become increasingly difficult to earn a good amount of interest of the money you save.
For those looking to purchase the fear is that not only does your interest earned take a hit, the lower lending rates and proposed loosening of lending restrictions to improve borrowing capacity could cause a bounce-back in the property market that has prices increasing faster than your deposit.
For pensioners and those on fixed income I would make sure you speak to one of our trusted financial advice partners about the risks between keeping funds in now lower yielding cash and the potential risks in switching to investing in bonds, equities, etc.
Watch this space for more finance updates, and be sure to stay subscribed to our social media channels for more frequent updates…
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