Interest rate cuts & how to make the most of them
By Don Crellin, Managing Director.
The Reserve Bank of Australia (RBA) has reduced the official cash rate from 1.50% to 1.25%. This is the first rate move since August 2016. We assume banks will announce they’re following suit by reducing their interest rates in the coming days, if they haven’t already. The RBA will expect lenders to pass on as much of this reduction as possible. Some experts are predicting up to three reductions over the coming year, the next is tipped for August.
What does this mean for me?
Rates were already at historical lows, so for Australians looking to buy, build or refinance, this cut will mean home loan rates are even more affordable. Plus, there are many signs that suggest rates will remain low for some time – which is even better news.
Ways you can potentially benefit from lower rates
- Lower rates give first home buyers a great opportunity to settle into the financial discipline of managing a home loan, because repayments may be more manageable
- For existing home owners looking to upgrade, lower rates provide a level of certainty around repayment serviceability, if taking on a larger financial commitment
- If you’re already in your dream home and looking to stay put, your home loan may see the benefit of lower repayments. It’s also a great opportunity in a competitive market to review possible refinance opportunities
- Existing mortgage holders could look to keep repayments at current levels or, if possible, increase them slightly to build up a repayment buffer while rates are so low.
Two examples of how rate cuts could benefit Australians
We’ve put together some hypothetical case studies to give you an idea of how this rate cut could benefit a homeowner. A good idea is to speak to a mortgage broker to get a real view of how your personal situation could change, once the banks announce any reductions their interest rates.
Case study 1: the interest rate on a family’s mortgage is reduced, so their minimum repayment amount will be less each month. this example shows you approximately how much they’ll save each month, depending on their loan value. It assumes their interest rate was 4.00% and is reduced to 3.75%.
*This case study assumes a past interest rate of 4% which is reduced to 3.75%, principal and interest repayments, over a 30-year term. Source: Resolve Finance, for illustrative purposes only. Try our calculators here to see how much you could save.
Case study 2: When their interest rate is reduced from 4.00% to 3.75%, a family chooses not to reduce their level of repayments. Instead they opt to continue to pay the same amount each month, which was calculated when rates were 4.00%, because this is factored into their family budget anyway. In this scenario, they’re now making larger repayments against their loan, which will help to decrease its term and will also save them considerably in interest.
* This scenario is hypothetical and assumes the interest rate remains at 3.75% for the life of the loan. The amount the family is repaying per month is calculated by estimating the repayment amounts on the same loan, but if it were being charged 4.00% interest. Assumes principal and interest repayments, 30-year term. Source: Resolve Finance, for illustrative purposes only.
Try our calculators here to see how much you could save.
So whether you’re a first home buyer looking to realise the dream of home ownership, or an existing home owner, rate cuts can be great news. However, you should speak to a mortgage broker so you can understand exactly what’s best for you. Click here to contact us today.