Everyone with a home loan is a winner on Melbourne Cup day today, as the Reserve Bank has lowered the official interest rates by 0.25%, but how will the lower rate affect your finances?
Lenders don’t have to change their rates just because the Reserve Bank does but some banks have already been cutting rates, especially on their fixed home loan products.
RP Data research director Tim Lawless said the rate cut should not come as a surprise from a housing market perspective, considering the soft market conditions that have been evident since June last year have created no inflationary pressures.
"The improved debt servicing position will be a welcome improvement to anyone with a mortgage, however the primary benefit from the rate cut is likely to be seen in an improvement in consumer sentiment which should lead to an uplift in housing transaction volumes, which are currently tracking about 13% below the five year average nationally," Lawless said.
However, whether you're a winner from the interest rate cut will depend on your personal circumstances and the action you take.
Are you mortgage stressed?
According to the latest Genworth Financial Homebuyer Confidence Index, the number of home owners facing mortgage stress has jumped to 25%.
First home buyers are doing it particularly tough at the moment. Of recent first-time buyers, 40% are using over half of their monthly income to service their home loan debt.
One bank, ME Bank publicly called on the Reserve Bank of Australia (RBA) to cut interest rates when it met today, and the decision to cut rates is to be welcomed.
CEO Jamie McPhee says recent CPI data shows a dramatic slowing of underlying inflation and that a rate cut is essential to assist families struggling with tight household budgets.
If you can relate to this scenario, the rate cut will spell welcome relief just in time for Christmas.
TIP: Look to the long term and consider keeping your repayments at their current level so you build up a buffer for when rates go up again and you can pay off your home faster.
Are you shopping for a loan?
Sometimes an official interest rate cut results in lenders putting a range of new offers and discounts to the market so take your time to shop around for the best new deal.
TIP: With rates down this week, consider holding off your application for at least a few days to see how lenders react.
Are you trying to save?
Lower rates are not good news for savers. If you’re attempting to get a home deposit together or save for another goal, rate cuts are never good news.
Currently the best rate currently available for two years is 5.75% from Heritage Building Society. The best 12-month rate currently available is 5.7% from ING Direct.
TIP: Don’t get seduced by high short-term term deposit rates. Rabo Direct is currently paying 5.93% for 90 days and several other 90-day term deposits are available for over 5.6% but if rates go down twice in the next three or four months, the best rate available by the time you renew might be 0.5% or more lower. That makes the current 12-month and 24-month deals seem a bit more attractive.
Do you depend on your investments for income?
Many retirees and pre-retirees have fled to cash since the share market crashed in August. Two rate cuts may be very bad news if your money is at call. Fortunately continuing volatility on world markets and a lake of overseas funding sources means banks, credit unions and building societies need to keep their savings rates competitive because they’re increasingly relying on deposits to fund their lending and other activities.
There are alternative non-bank fixed-income products such as debentures, bonds and managed funds but they don’t have the backing of the $250,000 government guarantee so chasing a higher rate does mean coping with some uncertainty.
TIP: Don’t panic. A rate cut always brings plenty of market noise, so it pays to wait until this settles down before shopping around for the best deal.
What a difference a year makes
A year ago on Melbourne Cup Day the Reserve Bank of Australia (RBA) raised its cash rate by 0.25% pa. Some banks raised their rates in line with the RBA adjustment but others, including all four major banks chose to lift their rates higher than the Reserve Bank’s cash rate rise:
- Commonwealth Bank increased by 0.45% p.a.
- NAB increased by 0.43% p.a.
- ANZ increased by 0.39% p.a.
- Westpac increased by 0.35% p.a.