The cash rate has reached a new record low of 0.10% after the RBA moved the cash rate down by 0.15% on Tuesday.

Speculation about a possible cut has been mounting in recent weeks. The RBA wants to encourage Australians to start spending again to bolster our battered economy; however, they have been waiting for the right time, to ensure the rate cut has maximum effect.

Now that most states are opening up, consumer confidence is on the rise and employment is bouncing back, the RBA hopes this latest cut will help create jobs by reducing expenses for businesses, and reducing the likelihood of mortgage holders defaulting on their loans.

The decision is great news for borrowers; however, the real kicker will be how much of the cut banks pass on to their customers.

While some lenders have been cutting variable rates outside of the cycle, this has mainly been reserved for new borrowers or those fixing their rates for a period of time, as banks battle for customers.

What should you do if you have a home loan?

For existing mortgage holders on variable rates, there will now be pressure from the RBA for lenders to reduce their variable rates by the full 0.15%.

On a 30-year, owner-occupier mortgage of $500,000, a cut from 3% to 2.85% would mean a $40 saving each month, equating to almost $1000 over the next two years.1

“For the RBA’s objectives to have an effect, rate savings must be passed on to consumers,” says Sam Boer, CEO of Smartline Mortgage Advisers. “For those customers who are struggling financially and don’t have the luxury of switching banks, if passed on, this cut will provide some breathing room. For example, it may just provide the extra cash some Australians need to get them through until they get another job. Or, it could be the difference between needing to sell their home and managing to keep it.

“For mortgage holders who don’t need the money to help with their day-to-day expenses, I strongly recommend putting the extra cash on your mortgage,” Mr Boer says.

Putting an extra $40 per month on a 30-year, owner-occupier mortgage of $500,000 at 2.85%, translates to over $8000 in interest savings over the term of the loan.2

“The cut should shake up the lending market a little, which could mean you can find a better rate elsewhere,” says Mr Boer. “If your lender isn’t passing on the full cut, it is worth speaking to your mortgage adviser to see if they can get you a more competitive rate through a refinance with another lender.”

Alternatively, some borrowers may find the rate cut is the impetus they need to upgrade their home. “Lower rates often open up the option of borrowing more, which may mean you can buy a bigger house or move to a nicer area,” says Mr Boer.

What does the cut mean for first home buyers?

While the rate cut won’t help first home buyers while they are saving for a deposit, it should mean they can access a more competitive rate once they are ready to take out their loan.

“First home buyers should ensure they speak to an experienced mortgage adviser who knows what options are out there in the market, and what rates various lenders are offering,” says Mr Boer. “Banks are only going to be more competitive now, so it’s important to look around so you can find the loan that suits you best. Of course, there are also a number of fantastic government incentives available for first home buyers at the moment, so if you are in the position to buy now, it’s the perfect time.”

 

SOURCES: 1Based on a standard variable principal and interest loan. Calculation from www.smartline.com.au/home-loans/calculators/loan-comparison-calculator, 2Based on a standard variable principal and interest loan. Calculation from www.smartline.com.au/home-loans/calculators/making-extra-repayments