As the dust settles from the Reserve Bank of Australia's decision last week to cut its official interest rate for the first time since 2016, Australian borrowers and savers are scrambling to work out how best to maximise the benefits, or reduce pain.
Interest in mortgages spiked after Tuesday’s 0.25 per cent rate cut and announcements that banks and other lenders were passing on all or most of the cut to customers.
Home Loan platform Lendi said borrower activity doubled within 24 hours of the RBA announcement.
“This may signify an important juncture for the housing market as more buyers are spurred into action, keen to get ahead of the pack and invest while it’s a buyers’ market,” said Lendi managing director David Hyman.
“We’re seeing a flurry of existing borrowers doing their research to find out which lenders are the most competitive.”
Many borrowers have seized on the rate cut as an opportunity to get ahead on their mortgage.
According to comparison site Canstar, the official rate slash to 1.25 per cent will result in savings of nearly $90 a month on a $600,000 loan.
Potential Repayment and Interest Savings from a 0.25% Rate Cut
|Loan Amount||Current Monthly Repayment (AVR 4.32%)||New Monthly Repayment (rate cut to 4.07%)||Savings per month||Interest Saved Over Life of the Loan|
Average variable rate current as of 10/06/2019 and is based on owner occupier loans available for $400,000 and 80% LVR. Monthly repayment and interest over the life of the locan calculations based on a 30 year loan term. Source: Canstar
Canstar finance expert Steve Mickenbecker however urged consumers to forgo the $90 stimulus, and instead pump it back into their mortgage in order to take advantage of the lowest rates ever experienced in Australia.
“If you are getting by on your household budget, why would you reduce the repayments?” Mr Mickenbecker told news.com.au.
“Eventually rates will go up, it might not be for a few years, but they’ll go up eventually so why would you not take advantage of it now when rates are low?”
Reserve Bank governor Philip Lowe has warned that interest rates could be even reduced further by the end of the year in order to help stimulate employment growth and inflation targets.
“Are interest rates going to be reduced further? The answer here is that the board has not yet made a decision, but it is not unreasonable to expect a lower cash rate,” he said.
“Our latest set of forecasts were prepared on the assumption that the cash rate would follow the path implied by market pricing, which was for the cash rate to be around 1 per cent by the end of the year.
“There are, of course, a range of other possible scenarios and much will depend on how the evidence evolves, especially on the labour market.”
Major lenders NAB and Commonwealth Bank announced last Tuesday that each would pass on the full 0.25 per cent cut to customers.
But rivals ANZ and Westpac said they would pocket some of the cut, lowering interest rates on mortgages by 0.18 and 0.20 per cent respectively.
With a difference of about 0.75 per cent between the smaller institutions and the big four, consumer advocates have advised Australians to check if their lender is passing on the rate cut, but also consider the bargain deals offered by the smaller lenders.
Finance expert at comparison site Finder Graham Cooke suggests consumers check their lender's social media and websites to see what the rate cut will mean for them.
"Get in touch with your lender to see if there’s anything better they can do for you — use your loyalty as leverage, especially if you have multiple accounts or products with them.
“At the end of the day, they don’t want to lose your business.”
“People owe it to themselves to have a good look,” said Mr Mickenbecker, “It’s not good enough to say you’ll wait for the Reserve Bank.
“It might drop again but you’ll still be on a reasonably high rate (with the major banks) relative to the deals you can get currently.
“There are some great rates out there, why would you pay 1 per cent more than that?”