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Newsflash: The RBA has cut the cash rate again

Amidst record-low inflation, the Reserve Bank of Australia (RBA) has reduced the official cash rate (OCR) to just 1.50%. What does that mean for your home loan?

The RBA cash rate decision this month surprised some economists, cutting the official cash rate to a record low of 1.50%. It is, domestically, uncharted waters.

Just 24 hours prior to the RBA meeting the Shadow RBA Board (a project by the Centre for Applied Macroeconomic Analysis, based at the ANU, which asks industry and academic economists what interest rate the Reserve Bank of Australia should set ), stated that there was just a 28% probability of a rate cut, and indeed an 18% probability that a rate rise was appropriate.

But to put that in perspective, the RBA Shadow Board also declared, in June 2015, that the cash rate had bottomed.

 

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In announcing its decision, the RBA stated that

In Australia, recent data suggest that overall growth is continuing at a moderate pace, despite a very large decline in business investment. Other areas of domestic demand, as well as exports, have been expanding at a pace at or above trend. Labour market indicators continue to be somewhat mixed, but are consistent with a modest pace of expansion in employment in the near term.

Recent data confirm that inflation remains quite low. Given very subdued growth in labour costs and very low cost pressures elsewhere in the world, this is expected to remain the case for some time.

Low interest rates have been supporting domestic demand and the lower exchange rate since 2013 is helping the traded sector. Financial institutions are in a position to lend for worthwhile purposes. These factors are all assisting the economy to make the necessary economic adjustments, though an appreciating exchange rate could complicate this.

Supervisory measures have strengthened lending standards in the housing market. Separately, a number of lenders are also taking a more cautious attitude to lending in certain segments. The most recent information suggests that dwelling prices have been rising only moderately over the course of this year, with considerable supply of apartments scheduled to come on stream over the next couple of years, particularly in the eastern capital cities. Growth in lending for housing purposes has slowed a little this year. All this suggests that the likelihood of lower interest rates exacerbating risks in the housing market has diminished.

Taking all these considerations into account, the Board judged that prospects for sustainable growth in the economy, with inflation returning to target over time, would be improved by easing monetary policy at this meeting.

What the rate cut means for your home loan

Currently on CANSTAR’s database, home loan interest rates are as follows:

Table: Residential Home Loan Market – Snapshot of the current market (01/08/2016)
Stat Standard Variable Package Variable 2 Year Fixed 3 Year Fixed 5 Year Fixed
Average 4.55% 4.38% 4.15% 4.18% 4.63%
Min 3.59% 3.79% 3.64% 3.67% 3.99%
Max 5.84% 5.35% 5.09% 5.14% 5.49%

Source: www.canstar.com.au, the search results do not include all home loan providers, and may not include all features relevant to you.

Using the average standard variable interest rate from the table above, mortgage holders that secure a 25 basis point reduction in their home loan interest rate could potentially make the following savings in monthly mortgage repayments.

Loan Amount  $500,000.00  $450,000.00  $400,000.00  $350,000.00  $300,000.00
Interest Rate 4.55% 4.55% 4.55% 4.55% 4.55%
Years 25 25 25 25 25
Monthly Repayment $2,793.37 $2,514.03 $2,234.70 $1,955.36 $1,676.02
Total Cost  $838,011.45  $754,210.30  $670,409.16  $586,608.01  $502,806.87

 

Loan Amount  $500,000.00  $450,000.00  $400,000.00  $350,000.00  $300,000.00
Interest Rate 4.30% 4.30% 4.30% 4.30% 4.30%
Years 25 25 25 25 25
Monthly Repayment $2,722.71 $2,450.44 $2,178.17 $1,905.90 $1,633.62
Total Cost  $816,812.41  $735,131.17  $653,449.93  $571,768.69  $490,087.45
*Monthly Difference $70.66 $63.60 $56.53 $49.46 $42.40

Please Note: The calculations do not take into account all fees and charges. The results provided by this calculator are an estimate only, and should not be relied on for the purpose of making a decision in relation to a loan. Interest rates and other costs can change over time, affecting the total cost of the loan. Consider whether you need financial advice from a qualified adviser.

While the cheapest home loan is not always the right choice for your situation, the good news for borrowers is that there are a number of financial institutions offering a variable rate under four percent, so there is plenty of choice out there.

Try out our Home Loan Repayments Calculator to see for yourself how much you could potentially save on your home loan.

 

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