After speculation for so long, the Reserve Bank of Australia today cut the cash rate by 25 basis points to 4.10%. What does this mean for you and your loan?
This is the first rate cut we’ve seen in 4 years. The last time the Reserve Bank of Australia (RBA) cut the cash rate, it was Nov 2020 and we were in the midst of a COVID-19 outbreak.
Since then, we’ve seen 13 rate hikes – each one an attempt by the RBA to curb inflation.
Today we feel a little relieved. (What about you?!)
We know there are lots of home owners still doing it tough. But today’s rate cut provides a welcome reprieve, some breathing room.
Or maybe this is the sign you were waiting for…. a tangible indicator that rates aren’t likely to keep increasing, providing you with confidence to take action and get a place of your own.
RBA Governor Michele Bullock said today in her statement (you can find it here) that inflationary pressures are now easing a little more quickly than expected.
“There has also been continued subdued growth in private demand and wage pressures have eased,” Governor Bullock said.
These factors have given the Board confidence that inflation has started to move more sustainably towards the RBA’s target range of 2–3 per cent.
It’s important to note the RBA cash rate is not your lending rate. Whilst variable home loan rates typically move up/down in line with the RBA cash rate, lenders don’t necessarily have to change their lending rates in accordance with RBA cash rate movements.
What happens to your loan?
If you have a variable rate loan, your lender will hopefully follow the RBA here and decrease the rate on your home loan by 0.25 .
(In as little as 10-15 minutes after the RBA media release, some lenders announced their variable rates would also drop by 0.25 – which is great news!)
For a $500,000 owner-occupier loan (30-year loan term, P/I repayments), a 0.25 rate decrease equates to an interest saving of $1,250/year.
For a $750,000 owner-occupier loan (30-year loan term, P/I repayments), a 0.25 rate decrease equates to an interest saving of $1,875/year.
So, when will my repayments decrease in line with the lower rate?
Well, not all lenders will automatically reduce the home loan repayment amounts in line with the rate cut. There can also be a bit of a time lag.
Some lenders review repayment amounts periodically and simply advise you when the repayment amount is set to decrease/increase, based on the rate change.
Other lenders will maintain your repayment amount at the old level, but charge you less interest from the date the new rate becomes effective. This means that more of your money each month will go towards paying off the principal (rather than the interest), which can help you get ahead on your loan.
If you’re keen on reducing your repayment amount ASAP, you can ask your lender directly to recalculate the minimum monthly repayment in line with the reduced interest rate. You will need to wait until the reduced rate has become effective with your lender, which can often be 1-3 weeks after the rate drop announcement.
If you’re worried about your mortgage, we’re here to help
Despite the latest cut, we know there are plenty of households still feeling the pinch of high living costs and high interest rates.
If you haven’t had a home loan review in a while, please reach to see if you could be saving on your home loan.
