Opinion: What's all this chat about an RBA cut?

What's all this chat about an RBA cut?

Update 2:30pm, Feb 3: RBA has now cut rates by 0.25%!

You may have been hearing more noise than usual about this month’s Reserve Bank of Australia’s (RBA) meeting. The reason for this is because it appears we are now getting much closer to seeing a rate move by the RBA – something we haven’t seen in almost 18 months. Now that this talk has well and truly escaped the finance section and hit the headlines, the questions on many people’s lips are why is this and what does it mean for me?

Firstly, why does the RBA even move rates?

The RBA cuts rates if it wants to spark up the economy, or increases rates if it wants to calm it down. The idea behind this is if people have cheaper home loans (and other loans) they will spend the extra cash elsewhere, and if they get less interest on their savings account they are more likely to invest it elsewhere. Vice versa for a interest rate rise.

What is the current situation?

The current signs point to a struggling economy, both within Australia and globally. Locally, unemployment is not getting any better. There are a few conflicting data sources for this, but none of it looks too good and this is a general sign of a struggling economy.

There is also what has been dubbed the global “currency war”. Europe is pouring money into their economies to stimulate, Switzerland just stopped putting an artificial limit on their currency, Canada just cut their version of the RBA rate, Denmark is now negative 0.5 percent for their official rate – which has resulted in people paying money to put money in the bank and getting paid to have mortgage!

Closer to home, the Aussie dollar (AUD) has been relatively high for a while, despite recent drops. This makes it hard for our export (expensive for other countries to buy our stuff) and tourism industries (backpackers can’t afford our schooners) to compete, which puts a strain on the economy. The RBA reportedly wants the Australian dollar to sit around 75c US and it’s been heading that way on the back of expectations of an RBA cut. If there is no cut, it will likely bounce back higher, quite quickly. A low RBA rate can force the AUD down as it makes it less attractive for other countries to put their money into anything priced in our money.

BUT! There’s always a but…

A cut may make the investor property market go a little too wild, which is the last thing the already scarce first home buyers need in some states.

There is no doubt that Sydney and Melbourne are already “frothy”. Sydney has just finished two years in a row of double digit growth, more growth would continue to hurt affordability and if something goes up too much, it must come down – despite some parts of Australia somewhat defying this rule, so far.

Meanwhile the rest of the country is a mixed bag. There’s only one RBA rate, so they need to take it all into consideration.

Inflation – how quickly prices on everyday things increase – is another big factor the RBA looks at. In the recent figures this came in higher than expected. If people spend more, prices can increase quicker. If the RBA cuts rates then people may spend more, so RBA cuts can equal more inflation.

But like unemployment, there are a few different ways to measure it. “Untradeables” inflation is low, and this shows the RBA how much things cost that most Aussie’s choose to spend their money on, rather than the exported/imported stuff, like that iron ore you keep hearing about.

So it looks like inflation alone will not stop the RBA cutting rates as what we are spending money on isn’t getting more expensive too quickly. By the way, the RBA defines “too quickly” as anything more than three percent, as they aim to keep in between two percent and three percent.

In between all this RBA banter you may have noticed petrol getting cheaper. Retail petrol prices have fallen 32 percent since last July, which will save householders on average close to over $60 a month, according to a report by Fitch Ratings. For many people that’s a similar, if not larger, savings than would result from a rate cut. So even though a rate cut will help home owners, the fall in petrol prices will have a larger positive impact to everyday Australians. For the RBA, this means some of the job may already be in progress, so maybe they don’t need to cut. 

So will they cut?!

At this point it is too close to call, Sportsbet agrees. That’s right – in true Aussie form, you can punt on the RBA meeting. Despite the speculation and opinions being thrown around, this month it’s not much easier than trying to guess the Melbourne Cup winner in November. It really could go either way.

That’s all well and good, but what does it mean for me?

It might not happen this month, but it is looking very likely that it will soon. This will mean even lower home loan rates, but lower savings rates too. If you’ve got money in the bank, you’ll need to search hard for a decent deal, here’s a good start. If you’ve got a home loan, consider piling that extra money you save each month (if you’re on a variable rate) into the loan – your older and wiser self will thank you one day. Of course, make sure you’re on a good rate too – with around 0.80% difference between the the average variable rate and some of the lowest on the market, there are three free RBA cuts available for anyone who switches to one of the lowest rates.

 

 

Did you find this helpful? Why not share this article?

Advertisement

RateCity

Money Health Newsletter

Subscribe for news, tips and expert opinions to help you make smarter financial decisions

By submitting this form, you agree to the RateCity Privacy Policy, Terms of Use and Disclaimer.

Advertisement

Learn more about home loans

When do mortgage payments start after settlement?

Generally speaking, your first mortgage payment falls due one month after the settlement date. However, this may vary based on your mortgage terms. You can check the exact date by contacting your lender.

Usually your settlement agent will meet the seller’s representatives to exchange documents at an agreed place and time. The balance purchase price is paid to the seller. The lender will register a mortgage against your title and give you the funds to purchase the new home.

Once the settlement process is complete, the lender allows you to draw down the loan. The loan amount is debited from your loan account. As soon as the settlement paperwork is sorted, you can collect the keys to your new home and work your way through the moving-in checklist.

Cash or mortgage – which is more suitable to buy an investment property?

Deciding whether to buy an investment property with cash or a mortgage is a matter or personal choice and will often depend on your financial situation. Using cash may seem logical if you have the money in reserve and it can allow you to later use the equity in your home. However, there may be other factors to think about, such as whether there are other debts to pay down and whether it will tie up all of your spare cash. Again, it’s a personal choice and may be worth seeking personal advice.

A mortgage is a popular option for people who don’t have enough cash in the bank to pay for an investment property. Sometimes when you take out a mortgage you can offset your loan interest against the rental income you may earn. The rental income can also help to pay down the loan.

When does Commonwealth Bank charge an early exit fee?

When you take out a fixed interest home loan with the Commonwealth Bank, you’re able to lock the interest for a particular period. If the rates change during this period, your repayments remain unchanged. If you break the loan during the fixed interest period, you’ll have to pay the Commonwealth Bank home loan early exit fee and an administrative fee.

The Early Repayment Adjustment (ERA) and Administrative fees are applicable in the following instances:

  • If you switch your loan from fixed interest to variable rate
  • When you apply for a top-up home loan
  • If you repay over and above the annual threshold limit, which is $10,000 per year during the fixed interest period
  • When you prepay the entire outstanding loan balance before the end of the fixed interest duration.

The fee calculation depends on the interest rates, the amount you’ve repaid and the loan size. You can contact the lender to understand more about what you may have to pay. 

What happens to my home loan when interest rates rise?

If you are on a variable rate home loan, every so often your rate will be subject to increases and decreases. Rate changes are determined by your lender, not the Reserve Bank of Australia, however often when the RBA changes the cash rate, a number of banks will follow suit, at least to some extent. You can use RateCity cash rate to check how the latest interest rate change affected your mortgage interest rate.

When your rate rises, you will be required to pay your bank more each month in mortgage repayments. Similarly, if your interest rate is cut, then your monthly repayments will decrease. Your lender will notify you of what your new repayments will be, although you can do the calculations yourself, and compare other home loan rates using our mortgage calculator.

There is no way of conclusively predicting when interest rates will go up or down on home loans so if you prefer a more stable approach consider opting for a fixed rate loan.

How much of the RBA rate cut do lenders pass on to borrowers?

When the Reserve Bank of Australia cuts its official cash rate, there is no guarantee lenders will then pass that cut on to lenders by way of lower interest rates. 

Sometimes lenders pass on the cut in full, sometimes they partially pass on the cut, sometimes they don’t at all. When they don’t, they often defend the decision by saying they need to balance the needs of their shareholders with the needs of their borrowers. 

As the attached graph shows, more recent cuts have seen less lenders passing on the full RBA interest rate cut; the average lender was more likely to pass on about two-thirds of the 25 basis points cut to its borrowers.  image002

Remaining loan term

The length of time it will take to pay off your current home loan, based on the currently-entered mortgage balance, monthly repayment and interest rate.

How to use the ME Bank reverse mortgage calculator?

You can access the equity in your home to help you fund your needs during your senior years. A ME Bank reverse mortgage allows you to tap into the equity you’ve built up in your home while you continue living in your house. You can also use the funds to pay for your move to a retirement home and repay the loan when you sell the property.

Generally, if you’re 60 years old, you can borrow up to 15 per cent of the property value. If you are older than 75 years, the amount you can access increases to up to 30 per cent. You can use a reverse mortgage calculator to know how much you can borrow.

To take out a ME Bank reverse mortgage, you’ll need to provide information like your age, type of property – house or an apartment, postcode, and the estimated market value of the property. The loan to value ratio (LVR) is calculated based on your age and the property’s value.

What is the Home Loan Rate Promise?

The Home Loan Rate Promise is RateCity putting its money where its mouth is. We believe that too many Australians are paying too much for their home loans. We’re so confident we can help Aussies save money, if we can’t beat your current rate, we’ll give you a $100 gift card.*

There are two reasons it pays to check your rate with the Home Loan Rate Promise:

  • You can find out how much you could save on your home loan by switching to a loan with a lower interest rate
  • If we can’t beat your current rate, you can claim a $100 gift card with our Home Loan Rate Promise*

What is a variable home loan?

A variable rate home loan is one where the interest rate can and will change over the course of your loan. The rate is determined by your lender, not the Reserve Bank of Australia, so while the cash rate might go down, your bank may decide not to follow suit, although they do broadly follow market conditions. One of the upsides of variable rates is that they are typically more flexible than their fixed rate counterparts which means that a lot of these products will let you make extra repayments and offer features such as offset accounts.

What is the difference between fixed, variable and split rates?

Fixed rate

A fixed rate home loan is a loan where the interest rate is set for a certain amount of time, usually between one and 15 years. The advantage of a fixed rate is that you know exactly how much your repayments will be for the duration of the fixed term. There are some disadvantages to fixing that you need to be aware of. Some products won’t let you make extra repayments, or offer tools such as an offset account to help you reduce your interest, while others will charge a significant break fee if you decide to terminate the loan before the fixed period finishes.

Variable rate

A variable rate home loan is one where the interest rate can and will change over the course of your loan. The rate is determined by your lender, not the Reserve Bank of Australia, so while the cash rate might go down, your bank may decide not to follow suit, although they do broadly follow market conditions. One of the upsides of variable rates is that they are typically more flexible than their fixed rate counterparts which means that a lot of these products will let you make extra repayments and offer features such as offset accounts.

Split rates home loans

A split loan lets you fix a portion of your loan, and leave the remainder on a variable rate so you get a bet each way on fixed and variable rates. A split loan is a good option for someone who wants the peace of mind that regular repayments can provide but still wants to retain some of the additional features variable loans typically provide such as an offset account. Of course, with most things in life, split loans are still a trade-off. If the variable rate goes down, for example, the lower interest rates will only apply to the section that you didn’t fix.

How is interest charged on a reverse mortgage from IMB Bank?

An IMB Bank reverse mortgage allows you to borrow against your home equity. You can draw down the loan amount as a lump sum, regular income stream, line of credit or a combination. The interest can either be fixed or variable. To understand the current rates, you can check the lender’s website.

No repayments are required as long as you live in the home. If you sell it or move to a senior living facility, the loan must be repaid in full. In some cases, this can also happen after you have died. Generally, the interest rates for reverse mortgages are higher than regular mortgage loans.

The interest is added to the loan amount and it is compounded. It means you’ll pay interest on the interest you accrue. Therefore, the longer you have the loan, the higher is the interest and the amount you’ll have to repay.

Does the Home Loan Rate Promise apply to discounted interest rate offers, such as honeymoon rates?

No. Temporary discounts to home loan interest rates will expire after a limited time, so they aren’t valid for comparing home loans as part of the Home Loan Rate Promise.

However, if your home loan has been discounted from the lender’s standard rate on a permanent basis, you can check if we can find an even lower rate that could apply to you.

What is a comparison rate?

The comparison rate is a more inclusive way of comparing home loans that factors in not only on the interest rate but also the majority of upfront and ongoing charges that add to the total cost of a home loan.

The rate is calculated using an industry-wide formula based on a $150,000 loan over a 25-year period and includes things like revert rates after an introductory or fixed rate period, application fees and monthly account keeping fees.

In Australia, all lenders are required by law to publish the comparison rate alongside their advertised rate so people can compare products easily.

What is the difference between a fixed rate and variable rate?

A variable rate can fluctuate over the life of a loan as determined by your lender. While the rate is broadly reflective of market conditions, including the Reserve Bank’s cash rate, it is by no means the sole determining factor in your bank’s decision-making process.

A fixed rate is one which is set for a period of time, regardless of market fluctuations. Fixed rates can be as short as one year or as long as 15 years however after this time it will revert to a variable rate, unless you negotiate with your bank to enter into another fixed term agreement

Variable rates is that they are typically more flexible than their fixed rate counterparts which means that a lot of these products will let you make extra repayments and offer features such as offset accounts however fixed rates do offer customers a level of security by knowing exactly how much they need to set aside each month.