What impact could a RBA cash rate cut have on borrowers and savers?

Australia’s central bank is tipped to cut the cash rate at least once this year, so we’ve crunched the numbers to see the impact that could have on Australian hip pockets. Hint: homeowners could get even more rate relief, while savers’ income will likely continue to slide.
RBA cash rate Feb 2020
Source: pada smith (Shutterstock)

The Reserve Bank of Australia (RBA) board decided to leave the cash rate on hold at 0.75% at its first board meeting of the year on Tuesday.

This decision was generally expected, given the economic impact of the bushfires as well as the coronavirus outbreak still unfolding, which may require the RBA to use its rate-cutting ammunition down the track.

RBA Governor Philip Lowe confirmed the bushfires and coronavirus would temporarily weigh on economic growth in Australia in the short term, but expects the economy to pick up by around 2.75% this year and 3% next year.

While Australia’s economic conditions might have been strong enough to withstand a steady cash rate for another month, economists say consumers are still not spending much – with spending stuck at around 2.5% for the past five years – which can be a sign of poor consumer sentiment.

Commonwealth Bank Chief Economist Michael Blythe said this week that the low spending is an indicator that income hasn’t been rising fast enough, primarily due to sluggish wages growth.

Consumers could probably do with some extra money in their pockets, then. If you have a mortgage, chances are a cash rate cut could put you in a better position to pay lower mortgage repayments each month and less interest over the life of your loan.

However, people trying to earn a decent return on their savings accounts would more likely draw the short straw and be faced with lower returns. This is because banks typically use the official cash rate as a guide to set the interest rates on their products, such as loans and savings accounts.

Economists widely anticipate there could be one or more cash rate cuts in coming months, with UBS anticipating the rate could go as low as 0.25% in June. So with this in mind, we’ve analysed the impact two more rate cuts could have on home loans and savings accounts.

Potential impact of rate cuts on home loan customers

Canstar analysis shows that a 0.25 percentage point cut to the official cash rate – bringing it down to 0.50% – could save the average owner-occupier around $56 per month on a $400,000 home loan, and more than $20,000 in total interest over the life of a 30-year home loan.

Two cash rate cuts of 0.25 percentage points –leaving the cash rate at just 0.25% as UBS predicts – could save the same borrower $112 per month and over $40,000 in total interest over the same 30-year term.

All this, of course, assumes that home lenders would pass on all of the cash rate reductions to consumers. That’s something Canstar’s finance expert Steve Mickenbecker thinks that probably won’t happen.

“The banks are unlikely to pass on cuts of more than 0.15 percentage points and home buyers likely using this to pay off their home loan sooner rather than spending,” Mr Mickenbecker said. “A cash rate cut at this point wouldn’t stimulate anything other than Sydney and Melbourne house prices.”

But he said home loan borrowers had the upper hand at the moment, whatever the RBA does, because interest rate competition continues to heat up. For instance, there are currently more than 270 owner-occupier home loans on Canstar’s database with interest rates below 3% (for $400,000 loan amounts and 20% deposits).

See how much a rate cut, or two, could impact mortgage repayments on various home loan amounts below:

Impact of 0.25 % Rate Cut on Monthly Repayment & Total Interest Paid
Loan Amount Current Average Variable Rate Rate after 0.25% Rate Cut Current Monthly Repayment New Monthly Repayment Reduction in Monthly Repayment Interest Saved Over Life of the Loan
$300,000 3.77% 3.52% $1,393 $1,350 $42 $15,216
$400,000 3.76% 3.51% $1,855 $1,798 $56 $20,275
$1,000,000 3.74% 3.49% $4,625 $4,485 $141 $50,622
Source: www.canstar.com.au – 03/02/2020. Average owner-occupier variable rates based on 80% LVR loans on Canstar’s database, excluding loans only available to first home buyers and loans with introductory periods. Monthly repayment and interest over the life of the loan calculations based on principal and interest repayments over a 30-year loan term and assume the lender passes on the full 0.25 percentage point cut.

 

Impact of 0.50% Rate Cut on Monthly Repayment & Total Interest Paid
Loan Amount Current Average Variable Rate Rate after 0.50% Rate Cut Current Monthly Repayment New Monthly Repayment Reduction in Monthly Repayment Interest Saved Over Life of the Loan
$300,000 3.77% 3.27% $1,393 $1,309 $84 $30,182
$400,000 3.76% 3.26% $1,855 $1,743 $112 $40,216
$1,000,000 3.74% 3.24% $4,625 $4,347 $279 $100,406
Source: www.canstar.com.au – 03/02/2020. Average owner-occupier variable rates based on 80% LVR loans on Canstar’s database, excluding loans only available to first home buyers and loans with introductory periods. Monthly repayment and interest over the life of the loan calculations based on principal and interest repayments over a 30-year loan term and assume the lender passes on the full 0.50 percentage point cut.

Potential impact of rate cuts on savings customers

Canstar analysis shows that a 0.25 percentage point cut to the official cash rate, bringing it down to 0.50%, could cost someone with an initial $10,000 stashed in a bonus savings account $26 per year on average, or around $2 less per month in interest earned.

Two cash rate cuts, bringing the rate down to 0.25%, could cost the same savers $52 per year and more than $4 less per month.

Those amounts might not sound too significant at first glance, but many savers are already suffering with razor-thin interest earnings.

Mr Mickenbecker said he expected a steady cash rate would please savers who have taken knocks in the last fortnight, with two of the major banks cutting savings rates.

“ANZ’s base savings rate is now down to 0.05%, precariously close to zero,” he said, adding that the other big four banks’ rates weren’t much better, with the highest among them being NAB’s rate of just 0.11%.

There are higher interest rates out there, though, with neobanks Xinja and 86 400 launching 2.25% interest savings accounts this year.

Below we show how much a rate cut, or two, could impact the average interest earned on $10,000 and $25,000 savings amounts:

Impact of a 0.25% Rate Cut on Interest Earned
Deposit Amount Current Average Total Rate Rate after 0.25% Rate Cut Difference in interest earned per…
Month Year
$10,000 1.50% 1.25% $2 $26
$25,000 1.50% 1.25% $5 $64
Source:  www.canstar.com.au – 03/02/2020.  Average Total Rate based on the base plus bonus interest rate for bonus saver accounts on Canstar’s database for the applicable deposit amount. Interest calculations assume $50 is deposited, and there are no withdrawals, each month.  Monthly interest is the average earned over a year divided by 12, including the effect of compound interest. Difference in interest figures shown in the table are rounded to the nearest whole dollar.

 

Impact of a 0.50% Rate Cut on Interest Earned
Deposit Amount Current Average Total Rate Rate after 0.50% Rate Cut Difference in interest earned per…
Month Year
$10,000 1.50% 1.00% $4 $52
$25,000 1.50% 1.00% $11 $128
Source:  www.canstar.com.au – 03/02/2020.  Average Total Rate based on the base plus bonus interest rate for bonus saver accounts on Canstar’s database for the applicable deposit amount. Interest calculations assume $50 is deposited, and there are no withdrawals, each month.  Monthly interest is the average earned over a year divided by 12, including the effect of compound interest. Difference in interest figures shown in the table are rounded to the nearest whole dollar.

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