What Does The Lower Interest Rate Mean For You?

In a move widely debated by the financial markets, the Reserve Bank made the decision this month to lower Australia’s official cash rate by a further 0.25%, to an historic low of 1.75%. You can read the monetary policy decision statement here.

Although expected by many it was nevertheless an interesting decision, particularly on the day of the Federal Budget and on the eve of an election campaign. Over the past twenty years, the RBA has reduced rates during only one other election campaign, as follows.

Election date Incumbent Prime Minister Rate movements in preceding 2 months
March 1993 Bob Hawke No movement
March 1996 Paul Keating No movement
October 1998 John Howard No movement
November 2001 John Howard 0.50% decrease
October 2004 John Howard No movement
November 2007 John Howard 0.25% increase
August 2010 Julia Gillard No movement
September 2013 Kevin Rudd 0.25% decrease

So what effect could the RBA decision have on your finances?

What does the low rate mean for mortgage holders?

The current average advertised standard variable interest rate for owner-occupier loans is 4.74%. If the cut is passed on in full then mortgage holders on the average rate, with a typical $300,000 mortgage over 30 years could expect their mortgage repayment to reduce by around $45 per month.

Table: Impact of rate cut on monthly repayments
  Monthly repayment Total repayment over 30 years Saving
Current average standard variable Interest Rate $1,563  $562,728
Cut of 0.25% $1,518  $546,578 $45

Source: www.canstar.com.au. Based on a $300,000 loan taken over 30 years excluding fees. The current interest rate is based on the average standard variable rateon Canstar’s database

On the other hand, if mortgage holders receive the rate cut but keep their monthly repayment amount the same, they could potentially save more than $30,000 in interest costs over the life of their mortgage and cut more than a year off the term of their mortgage.

Table: Potential savings if repayments maintained
  Monthly repayment Total repayment Saving
Current Interest Rate $1,563  $562,728
Keeping the repayment the same after cut $1,563 $530,022 $32,706 

Source: www.canstar.com.au. Based on a $300,000 loan taken over 30 years excluding fees. The current interest rate is based on the average standard variable rate on Canstar’s database

Of course, mortgage holders should also take control of their own loans and do their own research.

On our database for example, the average standard variable rate is currently 4.74%. But there are plenty of loans with an advertised interest rate of less than 4%. A mortgage holder with a $300,000 mortgage over 30 years who did their own research and switched from an average rate to the lowest rate could potentially save themselves more than $200 per month and more than $72,000 over the life of their loan.

Why not check out the home loan products currently on offer.

What does the low rate mean for savers?

Unfortunately while rate cuts are great news for mortgage holders, they are not great news for savers!

The current average interest rate on $250,000 12-month term deposits surveyed is 2.67%. For savers on the most common marginal tax rate of 34%, this would see them barely break even. In fact for an investment of $100,000 into an average 12-month term deposit, savers on the 34% marginal tax rate would be ahead by less than $53 at the end of twelve months after taking tax and inflation into account.

Marginal Tax Rate Inflation rate Gross before-tax return needed to break even
20.5% 1.30% 1.94%
34.0% 1.30% 2.59%
38.5% 1.30% 2.87%
46.5% 1.30% 3.47%
Source: Canstar. Includes Medicare levy of 1.5%

So if the average follows the rate cut down by 0.25%, it means that someone investing $250,000 in a 12 month term deposit will receive around $650 less in income over that period. Again – savers should shop around for a good rate. Currently on our database the interest paid on a 12 month term deposit of $250,000 varies between institutions, from a minimum of 2.10% up to 3.30%. It’s a significant difference, so certainly worthwhile doing some homework.

Check out the term deposit and savings accounts products currently on offer using our comparison website:

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