On 3 November 2020, the Reserve Bank Australia (RBA) cut interest rates to a new record low of 0.1 per cent down from the previous 0.25 per cent.
The decision for the cut was made as an economic response to Australia entering a recession in hope to further boost the economy. This is good news for homeowners as banks are encouraged to pass on the rate cut, which should support more spending.
This is also good news for property prices as they are expected to increase. The last interest rate cut saw more people entering the property market, driving up housing demand as home loan repayments became more affordable.
CASE EXAMPLE: If we look at the current average home loan rate of 2.64 per cent on an average Australian mortgage amount of $500,000 (on a 25-year principal and interest), the average owner-occupied home loan monthly repayment would come to $2,288.
If your lender were to pass on the 15 per cent rate cut your monthly repayments would reduce to $2,251 per month – that’s a saving of $444 per year.
Over the entire length of your loan, this equals a potential saving of $11,380. Speaking with Invest Blue, Credit Adviser, Damien Mifsud, he mentions
“the good news is that lenders are being encouraged to pass the savings on to homeowners, however, given we’re already at the bottom of the market, the savings may not be substantial, for those that have recently engaged us. But I do find that those that haven’t had a review in the last 9 months there is still plenty of opportunity to save”
He also added: “we are starting to see some rates come in under 2% and so as you can imagine most new clients we are seeing currently have a rate of over 3%.”
If your interest rate is currently over three per cent, refinancing could be a good option for you if you’re in a position to do so. This could result in significant savings on your mortgage repayments and assist in reducing your debt.
While lower interest rates may be good for homeowners or those in a position to buy or refinance it, it may not the best news for savers as interest rates on savings accounts are also kept to a minimum.
What does this mean for investors? We report on this in our latest market update “RBA cut rates to just 0.1 per cent and ramps up quantitative easing, but will it work?”
We can see while the latest cut has the potential to create some savings for households and further support the property market, the impact this will make on the economy won’t be as drastic as the impacts from the latest budget.
Hand in hand, however, both the budget and the latest decision to lower the cash rate should see the economy bounce back over time.
If you would like to discuss your refinancing or lending option speak to our lending team today.
What you need to know
This information is provided by Invest Blue Pty Ltd (ABN 91 100 874 744). The information contained in this article is of general nature only and does not take into account the objectives, financial situation or needs of any particular person. Therefore, before making any decision, you should consider the appropriateness of the advice with regards to those matters and seek personal financial, tax and/or legal advice prior to acting on this information. Read our Financial Services Guide for information about our services, including the fees and other benefits that AMP companies and their representatives may receive in relations to products and services provided to you.
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