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How the rate cut will impact you

How the rate cut will impact you

Home owners and potential first home buyers got an early Christmas present yesterday when the Reserve Bank cut the official cash rate for the second consecutive month to 4.25 percent.

The rate cut will bring some extra income and options to around 2.5 million Australians with variable ratehome loans this Christmas period, according to Damian Smith, chief executive of RateCity.

“The Reserve Bank has given Australians a good reason to celebrate this month, potentially shaving another $50 off monthly repayments on the average home loan,” he said.

Treasurer Wayne Swan said, “[The] decision to cut interest rates again will provide Christmas cheer to families and small businesses, that is particularly welcome around Christmas”.

How much better off?

By switching to a low-rate loan, borrowers with a $300,000 mortgage could save over $230 each month in repayments. Smith says that by maintaining higher repayments borrowers could save almost $80,000 of interest over 25 years and be mortgage-free more than five years sooner. To work out how much you could potentially save by switching or simply by increasing your repayments try using a mortgage calculator.

Don’t be complacent

Borrowers shouldn’t use two consecutive rate reductions as an excuse to sit tight and not shop around, because by doing so they could be missing out on even bigger savings.

“Many borrowers may not realise that they could shave more than 122 basis points off their mortgage by switching from the benchmark standard variable [the average of the four major banks –ANZ, Commonwealth Bank, nab and Westpac Bank] to one of the cheapest variable rate loans on the market –far more than the effect of any 0.25 percent reduction from the Reserve Bank,” said Mr Smith.

How fixed rate loans stack up

There are some great bargains in the fixed rate home loan market this month with majority of lenders having slashed their fixed rates in the lead up to November, which in the absence of a Reserve Bank-led cash rate movement is an unprecedented change, according to Smith.

“Since then, however, fixed rates have fallen even further, with the average 1-year fixed rate now 6.37 percent and starting at just 5.64 percent,” he says.

Even if the benchmark basic variable rate goes down by 0.25 percent to 6.61 percent, there will still be 75 1-year fixed rate loans below that average, according to the RateCity database.

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