RBA considers cutting record low cash rate

High unemployment, tapering stimulus payments, a sagging property market and a possible second wave of the pandemic will likely be front of mind when the Reserve Bank of Australia meets today to decide if an unprecedented rate cut should take place.

The cash rate, already at a thirty year low of 0.25 per cent, could be uncharacteristically cut by a fraction of the typical quarter-of-a-per cent, after Reserve Bank of Australia Governor Philip Lowe floated the possibility last month.

“Using international experience as a guide, it would have been possible to configure the existing elements of the RBA package differently,” he said, in an address to the Anika Foundation on July 21.

“For example, the various interest rates currently at 25 basis points could have been set lower, at say 10 basis points.”

A decision was made at the time to hold the cash rate -- a marker for the interest rates of unsecured loans held between banks -- with the Governor concluding the economic climate at the time didn’t warrant it.

The 0.25 per cent rate is at the RBA's effective lower bound, the proverbial floor on how low the rate could fall.

But a cut to a lower rate is still on the table if things change in the future, Mr Lowe said.

“The Board has … not ruled out future changes to the configuration of this (cash rate) package if developments in Australia and overseas warrant doing so,” he said.

Victoria’s entering into a Stage 4 lockdown following a second wave outbreak could be the change of circumstance that prompts the extraordinary move to lower the cash rate to another new low.

The lockdown will blow out the $3.3 billion that the pandemic was budgeted to cost, Treasurer Josh Frydenberg said on July 3, while there are concerns the second lockdown will devastate families, workers and small businesses.

The RBA board will announce their decision after meeting at 2.30pm today, July 4. Little is likely to change if the rate stays the same, but a drop could see a dip in variable home loan interest rates, provided banks pass on the cut.

Property, savings and more expected to plunge

The COVID-19 coronavirus has presented unique challenges to the global economy. In Australia’s capital cities, growth has generally been bucked and families have been financially squeezed.

About 21 per cent of Australian households have about $300 in savings, ME Bank’s biannual Household Financial Comfort report found. The amount is noticeably less than the current JobSeeker fortnightly payment, and its gradual tapering could leave them with what the bank described as a “savings cliff”.

The value of houses and apartments generally dropped across the country, data firm CoreLogic found. Melbourne property prices dropped 1.2 per cent in July, followed by a drop of 0.9 per cent in Sydney. The drop, the third consecutive on record since the COVID-19 coronavirus interrupted ordinary everyday life, did not offset strong yearly growth.

The economic fallout of the COVID-19 coronavirus is likely to financially scar generations, a Productivity Commision report found. The report studied the effects the Global Financial Crisis had on Australians and found 20 to 34-year-olds suffered irrecoverable setbacks in their careers, nor did they earn the same levels of income as the generations before them.

Authors of the report described the findings as “salient”, noting it offered an idea of the fallout from a COVID-19 recession.

Low rates lead to a refinancing rush

Borrowers are looking to take advantage of low interest rates by refinancing. A RateCity survey of 1009 people found 43 per cent of home loan borrowers are looking to refinance in light of COVID-19 and record low rates. 

The number eclipsed comparative findings from a 2018 survey, where just 19 per cent of borrowers were looking to refinance.

A RateCity analysis of RBA data found owner occupiers could save $2805 in their first year by switching to the lowest variable rate loan on the market, and $19,235 over five years -- including switching costs -- on a typical $400,000 loan.

“It’s taken a pandemic to get people to shift their mindset, but hopefully we’ll come out of it more budget-conscious and less complacent towards our mortgages,” Sally Tindall said, research director at RateCity. 
 
“The best way you can get a rate cut is to turn yourself into a new customer and switch. If you aren’t in a position to refinance, pick up the phone and try some old-fashioned haggling with your bank.
 
“The banks are pulling out all the stops too, putting some of the biggest cash back offers and rock-bottom rates on the table and adding more flexibility on fixed rate loans to attract new business – and it is working.”

Update, 2.40pm: The Reserve Bank of Australia has announced no change to the 0.25 per cent cash rate.
 
Governor Philip Lowe described the measure as “accommodative” and necessary given the tumult brought on by COVID-19.
 
“The Australian economy is going through a very difficult period and is experiencing the biggest contraction since the 1930s,” he said. 
 
“As difficult as this is, the downturn is not as severe as earlier expected and a recovery is now underway in most of Australia. 
 
“This recovery is, however, likely to be both uneven and bumpy, with the coronavirus outbreak in Victoria having a major effect on the Victorian economy.”

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Learn more about home loans

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.

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.

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 a honeymoon rate and honeymoon period?

Also known as the ‘introductory rate’ or ‘bait rate’, a honeymoon rate is a special low interest rate applied to loans for an initial period to attract more borrowers. The honeymoon period when this lower rate applies usually varies from six months to one year. The rate can be fixed, capped or variable for the first 12 months of the loan. At the end of the term, the loan reverts to the standard variable rate.

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 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

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 best interest rate for a mortgage?

The fastest way to find out what the lowest interest rates on the market are is to use a comparison website.

While a low interest rate is highly preferable, it is not the only factor that will determine whether a particular loan is right for you.

Loans with low interest rates can often include hidden catches, such as high fees or a period of low rates which jumps up after the introductory period has ended.

To work out the best value for money, have a look at a loan’s comparison rate and read the fine print to get across all the fees and charges that you could be theoretically charged over the life of the loan.

What are the pros and cons of no-deposit home loans?

It’s no longer possible to get a no-deposit home loan in Australia. In some circumstances, you might be able to take out a mortgage with a 5 per cent deposit – but before you do so, it’s important to weigh up the pros and cons.

The big advantage of borrowing 95 per cent (also known as a 95 per cent home loan) is that you get to buy your property sooner. That may be particularly important if you plan to purchase in a rising market, where prices are increasing faster than you can accumulate savings.

But 95 per cent home loans also have disadvantages. First, the 95 per cent home loan market is relatively small, so you’ll have fewer options to choose from. Second, you’ll probably have to pay LMI (lender’s mortgage insurance). Third, you’ll probably be charged a higher interest rate. Fourth, the more you borrow, the more you’ll ultimately have to pay in interest. Fifth, if your property declines in value, your mortgage might end up being worth more than your home.

How do I know if I have to pay LMI?

Each lender has its own policies, but as a general rule you will have to pay lender’s mortgage insurance (LMI) if your loan-to-value ratio (LVR) exceeds 80 per cent. This applies whether you’re taking out a new home loan or you’re refinancing.

If you’re looking to buy a property, you can use this LMI calculator to work out how much you’re likely to be charged in LMI.

What happens when you default on your mortgage?

A mortgage default occurs when you are 90 days or more behind on your mortgage repayments. Late repayments will often incur a late fee on top of the amount owed which will continue to gather interest along with the remaining principal amount.

If you do default on a mortgage repayment you should try and catch up in next month’s payment. If this isn’t possible, and missing payments is going to become a regular issue, you need to contact your lender as soon as possible to organise an alternative payment schedule and discuss further options.

You may also want to talk to a financial counsellor. 

How personalised is my rating?

Real Time Ratings produces instant scores for loan products and updates them based what you tell us about what you’re looking for in a loan. In that sense, we believe the ratings are as close as you get to personalised; the more you tell us, the more we customise to ratings to your needs. Some borrowers value flexibility, while others want the lowest cost loan. Your preferences will be reflected in the rating. 

We also take a shorter term, more realistic view of how long borrowers hold onto their loan, which gives you a better idea about the true borrowing costs. We take your loan details and calculate how much each of the relevent loans would cost you on average each month over the next five years. We assess the overall flexibility of each loan and give you an easy indication of which ones are likely to adjust to your needs over time. 

How often is your data updated?

We work closely with lenders to get updates as quick as possible, with updates made the same day wherever possible.

How can I get a home loan with no deposit?

Following the Global Financial Crisis, no-deposit loans, as they once used to be known, have largely been removed from the market. Now, if you wish to enter the market with no deposit, you will require a property of your own to secure a loan against or the assistance of a guarantor.