Acting on the latest RBA rate cut: What does it mean for you?

The Reserve Bank of Australia has cut the official cash rate for the third time this year to 0.75%. Given the knock-on effect this is already having on interest rates, what can homeowners and savers do now to put themselves in the best position? Here are some ideas to consider.

What does the rate cut mean for homeowners? 

For homeowners with a fixed-rate loan, the rate cut won’t impact your current interest rate or mortgage repayments for the remainder of your fixed term. 

However, if you have a variable rate home loan and your lender passes on some or all of the rate cut, this means you’ll be paying less interest on your loan, in the short term at least, and you may end up with lower regular mortgage repayments as a result.

How much could you save on your mortgage?

The amount you save on your mortgage will depend on how much your lender has lowered your interest rate by and the size of your home loan. According to Canstar data, if your lender passes on the full 25 basis point cut, this could save you thousands over the life of your loan.

For example, an owner-occupier making monthly principal and interest repayments on a 30-year, $400,000 home loan would save around $57 per month in repayments. This is a total potential saving of $20,565 in interest over the life of the loan, assuming the interest rate doesn’t go back up in future.

Potential Repayment and Interest Savings from a Rate Cut of 0.25%
Loan Amount Current monthly repayment (average variable rate of 3.98% p.a.) New monthly repayment (rate cut to 3.73% p.a.) Reduction in monthly repayment Interest saved over life of the loan 
$300,000 $1,429 $1,386 $43 $15,424
$400,000 $1,905 $1,848 $57 $20,565
$1,000,000 $4,763 $4,620 $143 $51,414
Source: www.canstar.com.au – 02/10/2019. Average owner occupier variable rate based on rates (excluding package rates) available for a loan amount of $400,000 at 80% LVR. Excludes loans with introductory periods and those exclusive to first home buyers. Monthly repayment and interest over the life of the loan calculations based on principal and interest repayments over a 30 year loan term. 

Another option is to maintain your current repayments (even if your interest rate falls) to pay off your debt quicker. According to our data, in the example above, doing this would save a borrower an additional $16,166 in interest and slice one year and seven months off a 30-year loan, assuming your rate doesn’t change again for the rest of your loan term.

How do you change your regular mortgage repayments?

If your interest rate has been cut and you want to free up some extra cash, you could choose to reduce your mortgage repayments. However, bear in mind, that your interest rate and regular repayments could go back up in future.

If you decide to reduce your regular repayments, how you do this will depend on your lender. 

Some lenders may automatically reduce your minimum repayment amount based on the lower interest rate, and in some cases will notify you of the change in advance. But depending on how you make your home loan repayments, you may still need to update your direct debit amount, particularly if the repayments are coming from a bank account with a separate provider.

Other lenders will not change the amount you pay back each week, fortnight or month without your instructions and will maintain your existing repayments if you don’t tell them otherwise. This would mean a bigger portion of your repayments are paying off the loan’s principal. 

If this is the case but you would like to lower your repayments, you should contact your lender. Some institutions may have an online portal where you can change your repayments yourself. 

One way or the other, it might be a good idea to contact your lender, so you’re clear on any potential changes.

What if your lender doesn’t pass on the rate cut?

If your lender hasn’t passed on the rate cut (either partially or in full), you’re entitled to call them and see if you can negotiate a lower rate. But before doing so, consider taking some time to do your research and see how your mortgage rate stacks up against the rest of the market. 

If your lender won’t budge and you aren’t happy with the rate you’re paying, then it could be time to think about scanning the market to see what other variable and fixed-rate loans are available.

 


What does the rate cut mean for savers?

Term deposits 

If the movements that followed June and July’s back-to-back rate cuts serve as any indication, savers can likely expect a number of rate changes from term deposit providers. If your term deposit provider does lower interest rates, this won’t have an immediate impact on your savings. As term deposits lock your money up at a fixed rate, any rate change by your institution isn’t going to impact your current interest rate. 

However, if your current term ends and your deposit automatically rolls over for the same term or you choose to reinvest it, it’s important to check what rate your institution is offering at this time, as it may have changed from when you initially took out your term deposit. 

Regardless, as you approach the end of your term, it may be a good idea to compare your options and see which providers are offering outstanding value to savers.

Savings accounts 

Some savers are also expected to be hit with lower savings account interest rates in the coming weeks. For example, Commonwealth Bank has already announced it will cut the base rate on its popular NetBank Saver product by 0.05%. If your rate drops, it might be a good idea to shop around and see who’s offering some of the highest savings account interest rates on our database.

Image Source: GaudiLab (Shutterstock)

Share this article