Understanding The Cash Rate Cuts
Updated: Jun 29, 2020
Many homeowners and investors have been rejoicing recently following the Reserve Bank of Australia’s (RBA) decision to cut the cash rate to an historic low of 0.75% last month. If you’re confused about what the cash rate is and how it affects your mortgage, you’re not alone. It was recently reported that 86 percent of Australians don’t know what the cash rate is. Let us explain.
What is the cash rate? The cash rate is the interest rate on overnight loans provided to banks. Banks lend each other funds on an overnight basis to meet their daily cash needs and the cash rate is the interest rate they pay. On the first Tuesday of every month, except January, the RBA board meets to set the cash rate and discuss monetary policy matters. When the RBA changes the cash rate, there are economic ramifications. It can influence the interest rate on your mortgage, the amount of interest your savings might earn, as well as having other implications for consumer spending, investment, inflation (the increase in the prices of goods and services over time) and employment. When the economy is strong, the RBA might decide to raise the cash rate to ensure inflation stays within an optimal range (the current consumer price inflation target for Australia is between 2-3 percent, on average, over time). When the economy is weak, the RBA might lower the cash rate to stimulate the economy and encourage spending.
How do cash rate cuts affect borrowers’ wallets? Banks take into account the cash rate when setting their home loan interest rates. A change in the cash rate may be passed on to variable rate mortgage holders – but not necessarily. Those on fixed rate loans will not be impacted. For borrowers whose banks do pass on cash rate cuts, it can mean big savings. Even small interest rate changes can result in large reductions to home loan repayments and sizeable savings in interest over the course of the loan. If you’re a new borrower, the cash rate cut means we may be able to find you a more competitive mortgage than what we may have been able to line you up with in the past.
Why it’s a good time to consider refinancing So far this year, there have been three cash rate cuts from the RBA. Some banks have passed on bigger rate cuts than others, so if you have had your mortgage for some time it could be worth reviewing it. Start by checking if your lender has passed on the recent rate cuts. Better yet, have us check that for you! Next, have a chat with your broker to see whether your current interest rate is still competitive. That’s what we are here to do.
Popular reasons to refinance • To score a better interest rate. • To add features like an offset account or redraw facility to your loan structure to reduce the amount of interest you pay. • To set up a line of credit or access equity for renovations, additional properties or other financial goals. • To consolidate debt. This is where you roll all your debts into your home loan or take out a personal loan to pay off your debts. • To shop around for a new loan if your fixed rate term recently ended.
We hope this has helped to explain what the RBA do and why it matters to you. Our job as your mortgage broker is to provide you with the education and support you need throughout your property buying and ownership journey, so if you are unsure of anything, please just ask! We are here to help.