RBA holds interest rates, no cut to extraordinary low

RBA holds interest rates, no cut to extraordinary low

Home loan repayments will not likely drop after the nation’s central bank held the cash rate at the historic low of 0.25 per cent, offering the financially strained little additional relief at a time when mortgage deferrals end and government payments shrink.

Speculation was rife the RBA would make the extraordinary move of cutting the cash rate by 0.15 basis points to 0.10, after senior executives hinted at the possibility at public engagements.

But at its board meeting today, the RBA decided to maintain its current policy setting until the country approaches “full employment”, claiming it is “working as expected”, by facilitating low borrowing costs and supplying credit to households and businesses.

“The Board is committed to do what it can to support jobs, incomes and businesses in Australia,” Philip Lowe said, Governor of the RBA.

“The Board views addressing the high rate of unemployment as an important national priority. (It) continues to consider how additional monetary easing could support jobs as the economy opens up further.”

A lower cut remains a possibility 

Rate cuts are typically adjusted by 0.25 per cent. Experts forecast an unusual rate cut of 0.15 per cent following comments made by senior executives that seemed to hint at the possibility. 

“Using international experience as a guide, it would have been possible to configure the existing elements of the RBA package differently,” RBA Governor Philip Lowe said in a July address

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

Deputy Governor Guy Debelle stoked the flames further when he mentioned the RBA may reduce interest rates “a little more without going into negative territory” in an online speech a fortnight ago.

Banks slashed rates, economists bet on a rate cut

The response was two fold: banks began slashing rates and economists began to expect a rate cut.

Eleven banks -- including Commonwealth Bank and ING -- cut the interest rates of 57 products within the last fortnight by an average of 0.25 per cent, according to a RateCity analysis.

AMP and Westpac economists, already anticipating a rate cut, struggled to pin down when it could happen, as the RBA announcement coincided with the reveal of the Federal budget.

Westpac believed it would complicate matters and rescheduled the timing. 

“A central bank moving on Budget Day could be interpreted by the government and the bank itself as diverting attention away from the budget and complicating the government’s task in ‘selling’ the budget,” Bill Evans said, the chief economist at Westpac. 

The bank now forecasts the cut will take place on November 3.

Cutting the cash rate would offer Australians struggling to pay their mortgage a financial lifeline at a time when it’s needed, likely lowering their repayments as deferrals are ending and the government’s support payments drop.

But the extra time will allow the RBA to consider the impact of the Federal budget, Sally Tindall said, research director at RateCity. 
“If the RBA cuts the cash rate by 0.15 per cent, there’ll be pressure on the banks to do right by their existing customers,” she said.
“At a time when every dollar counts, a rate cut of 0.15 per cent would save the average mortgage holder (about) $33 a month.”

A 0.15 cut won’t make a material difference: RBA Governor

Reducing the cash rate incrementally wouldn’t provide “much of a material difference,” Governor Philip Lowe said, in his most recent testimony before a parliamentary committee

“Given the nature of the problems the country faces, us moving interest rates by five or 10 basis points isn't really going to make a material difference,” he said.

“There's not going to be much traction from that; the problems are elsewhere. 

“It's not the cost and availability of credit that's causing the weak economic activity; it's the lack of confidence; it's the shutdowns; it's the pandemic.” 

He did not rule out the possibility of cutting the interest rate in the future.

“If we get to the point where the board's judgement is that we would get traction from further adjustments in policy, then we're prepared to do that,” he said.

Will Australia have negative interest rates like some other countries?

Bank interest rates can go into the negative, a measure that’ll encourage people to borrow money at the expense of what they’d stand to make in interest rates on their savings.

But the nation’s central bank has been reluctant to institute the measure. 

Governor Philip Lowe described the move as being “extraordinarily unlikely”, claiming it would hurt the job recovery at a time when 932,000 jobs were lost in the quarter from March to June, according to the Australian Bureau of Statistics.

“My concern, at least at the moment, is that negative interest rates would make credit supply (to businesses) more difficult and that would hurt jobs,” Mr Lowe told the parliamentary committee. 

“My current view is that negative interest rates wouldn't help jobs, and, arguably, could make things worse.

“If that judgement changes, then we'll move.”


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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.

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 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 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.

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.

Interest Rate

Your current home loan interest rate. To accurately calculate how much you could save, an accurate interest figure is required. If you are not certain, check your bank statement or log into your mortgage account.

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 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.

Does Australia have no cost refinancing?

No Cost Refinancing is an option available in the US where the lender or broker covers your switching costs, such as appraisal fees and settlement costs. Unfortunately, no cost refinancing isn’t available in Australia.

Can I change jobs while I am applying for a home loan?

Whether you’re a new borrower or you’re refinancing your home loan, many lenders require you to be in a permanent job with the same employer for at least 6 months before applying for a home loan. Different lenders have different requirements. 

If your work situation changes for any reason while you’re applying for a mortgage, this could reduce your chances of successfully completing the process. Contacting the lender as soon as you know your employment situation is changing may allow you to work something out. 

Can I get a home loan if I am on an employment contract?

Some lenders will allow you to apply for a mortgage if you are a contractor or freelancer. However, many lenders prefer you to be in a permanent, ongoing role, because a more stable income means you’re more likely to keep up with your repayments.

If you’re a contractor, freelancer, or are otherwise self-employed, it may still be possible to apply for a low-doc home loan, as these mortgages require less specific proof of income.

Will I have to pay lenders' mortgage insurance twice if I refinance?

If your deposit was less than 20 per cent of your property’s value when you took out your original loan, you may have paid lenders’ mortgage insurance (LMI) to cover the lender against the risk that you may default on your repayments. 

If you refinance to a new home loan, but still don’t have enough deposit and/or equity to provide 20 per cent security, you’ll need to pay for the lender’s LMI a second time. This could potentially add thousands or tens of thousands of dollars in upfront costs to your mortgage, so it’s important to consider whether the financial benefits of refinancing may be worth these costs.

Is there a limit to how many times I can refinance?

There is no set limit to how many times you are allowed to refinance. Some surveyed RateCity users have refinanced up to three times.

However, if you refinance several times in short succession, it could affect your credit score. Lenders assess your credit score when you apply for new loans, so if you end up with bad credit, you may not be able to refinance if and when you really need to.

Before refinancing multiple times, consider getting a copy of your credit report and ensure your credit history is in good shape for future refinances.

I have a poor credit rating. Am I still able to get a mortgage?

Some lenders still allow you to apply for a home loan if you have impaired credit. However, you may pay a slightly higher interest rate and/or higher fees. This is to help offset the higher risk that you may default on your repayments.