RBA Governor warns cash rate won’t drop any further

RBA Governor warns cash rate won’t drop any further

Mortgage interest rates are unlikely to drop any further after the head of the nation’s central bank warned the benchmark that influences them has bottomed out.

When the Reserve Bank of Australia (RBA) cut the cash rate to 0.10 per cent on Tuesday, it lowered it to a level not seen in 30 years of documented history.

To get it that low, the board members had to cut it by 0.15 per cent from 0.25 per cent, which was atypical because the rate is traditionally cut at quarter-of-a-per cent increments.

Other countries have lowered the cash rate into negative territory, a point of inflection where banks pay customers to finance money from them and in turn charge them fees.

But the head of the RBA has repeatedly said it’s “extraordinarily unlikely” negative interest rates will be seen in Australia. In fact, he’s said the 0.10 per cent cash rate is as low as it’ll go.

“The board is not contemplating a further reduction in interest rates,” Governor Philip Lowe said, in a Statement on Monetary Policy released today.

“... interest rates have been lowered as far as it makes sense to do so in the current environment.

“The board considers that there is little to be gained from short-term interest rates moving into negative territory and continues to view a negative policy rate as extraordinarily unlikely.”

It looks like it’ll ‘bottom out’ for a while

The cash rate, a guardpost that guides interest rates on mortgages and savings accounts, will likely stagnate at 0.10 per cent until the economy recovers, Mr Lowe said.

“The board has committed not to increase the cash rate target until actual inflation is sustainably within the target range of 2–3 per cent,” he said.

“This will require a period of strong employment growth and a return to a tight labour market.”

The COVID-19 pandemic plunged Australian into its first peacetime recession since 1930, leading to a quarterly contraction of 7 per cent, locking down states and shuttering businesses.

The unemployment rate is expected to idle at 8 per cent by the end of the year, Mr Lowe said, well above its longtime level of 5 per cent.

Lowering the cash rate is one relief measure intended to help people spend less money servicing their mortgage.

Big four banks choose not to pass the rate cut on

Australians who hold a variable rate mortgage with Commonwealth Bank, ANZ, NAB or Westpac won’t benefit from the reprieve the most recent rate cut could provide. This is because these banks are not passing it onto existing customers.

Combined, these four banks have about 467,000 people presently unable to resume their mortgage repayments, according to APRA’s September data.

A person with a $500,000 mortgage being charged interest at 3.19 per cent over 30 years would save $41 a month -- or $489 a year -- if the rate cut was passed on and their interest rate dropped to 3.04 per cent.

And the savings would be greater had these banks passed on the preceding rate cut to existing customers, but the only one to do so was ANZ.

The cash rate has dropped 1.25 per cent since June last year, but according to a RateCity analysis, the banks have passed only 0.86 per cent on average to existing customers.

Several smaller lenders have passed the savings onto existing customers. These include:

Bank Rate change New variable rate Effective from
Athena Home Loans

-0.15

2.19%

3 November

Pacific Mortgage Group

-0.1

1.89%

3 November

Homeloans.com.au

-0.15

2.14%

3 November

ME Bank

-0.15

2.43%

26 November

UBank

-0.15

2.34%

29 November

The banks with the lowest interest rates on owner occupier loans are as follows, as of the time of writing.

Lender Advertised rate
Reduce Home Loans 1.77%
Homestar Finance 1.79%
Pacific Mortgage Group 1.89%
Freedom Lend 1.97%
Well Home Loans 2.17%

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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 a valuation and valuation fee?

A valuation is an assessment of what your home is worth, calculated by a professional valuer. A valuation report is typically required whenever a property is bought, sold or refinanced. The valuation fee is paid to cover the cost of preparing a valuation report.

Who offers 40 year mortgages?

Home loans spanning 40 years are offered by select lenders, though the loan period is much longer than a standard 30-year home loan. You're more likely to find a maximum of 35 years, such as is the case with Teacher’s Mutual Bank

Currently, 40 year home loan lenders in Australia include AlphaBeta Money, BCU, G&C Mutual Bank, Pepper, and Sydney Mutual Bank.

Even though these lengthier loans 35 to 40 year loans do exist on the market, they are not overwhelmingly popular, as the extra interest you pay compared to a 30-year loan can be over $100,000 or more.

What is bridging finance?

A loan of shorter duration taken to buy a new property before a borrower sells an existing property, usually taken to cover the financial gap that occurs while buying a new property without first selling an older one.

Usually, these loans have higher interest rates and a shorter repayment duration.

What is breach of contract?

A failure to follow all or part of a contract or breaking the conditions of a contract without any legal excuse. A breach of contract can be material, minor, actual or anticipatory, depending on the severity of the breaches and their material impact.

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.

How much are repayments on a $250K mortgage?

The exact repayment amount for a $250,000 mortgage will be determined by several factors including your deposit size, interest rate and the type of loan. It is best to use a mortgage calculator to determine your actual repayment size.

For example, the monthly repayments on a $250,000 loan with a 5 per cent interest rate over 30 years will be $1342. For a loan of $300,000 on the same rate and loan term, the monthly repayments will be $1610 and for a $500,000 loan, the monthly repayments will be $2684.

What is the amortisation period?

Popularly known as the loan term, the amortisation period is the time over which the borrower must pay back both the loan’s principal and interest. It is usually determined during the application approval process.

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Real Time Ratings™ is a new idea and will change over time to match the frequently-evolving demands of the market. Some things won’t change though – it will always rate all relevent products in our database and will not be influenced by advertising.

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