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Lowest interest rates yet – what does this mean and how you can make the most of it?

Interest rates in Australia are at an all-time low of 0.75% with speculations we could see this drop even further. What does that mean for you and how can you make the most of it?

 

Interest rates in Australia are at an all-time low of 0.75% with speculations we could see this drop even further. What does this mean for you and how can you make the most of it? (iv)

 

Rates are at an all-time low, what does this mean?

Oct 2019: If you’re looking to refinance, take out a new loan or buy your first property, there has never been a better time to lock in with interest rates at a historic, record low. On the 1st of October, the Reserve Bank of Australia (RBA) set the cash rate at an all-time low of 0.75%, down again from 1% (i). For the last 20 years we have seen the average cash rate sitting at 5.1% (i) The highest rate for this period was in 2008 where we saw interest rates sitting at 7.25%. They have been relatively stable for the last three years sitting on 1.5% until more recent quarters when the RBA began to cut rates.

Keep in mind the cash rate is the rate between bank to bank, so what the RBA passes onto the banks. It is up to the bank whether they pass on the discount to their customers which is why it’s always worth shopping around for the perfect loan. Most banks then charge a commission rate between 2-3% on top of the cash rate.

 

Why did the RBA make further drops to the cash rate?

The RBA meets on the first Tuesday of every month to set the cash rate.  By controlling the cash rate, the RBA can have an element of control over the economy’s growth rate, are able to have some control over the performance of the Australian dollar, and control inflation rates. (iii) The purpose for the recent drop is to try to stimulate the flagging domestic economy, following the suit set by US’s Donald Trump to encourage investments domestically instead of in overseas affairs as a result of the US-China Trade War. (v)

How will the lowered cash rate impact your lifestyle and affordability?

One of the most obvious impacts a lowered cash rate has is on the property market, with property prices escalating across the country. This is because owners can borrow and spend more as their interest repayments are lowered.  This also means there is more money in circulation for housing growth and development. In the last month alone the property market went up by 0.8% nationwide (viii)

For homeowners, lowered interest rate essentially means their repayments are reduced and therefore they have more money to spend on lifestyle and leisure. This is great for small business owners who should benefit from more money in the economy and employment rates should improve as a result.

 

What to be mindful of with a lower cash rate

While this is a great time for homeowners, it does raise fear for those not yet in a position to borrow. As demand for housing increases, prices will continue to rise; leaving those who are not ready now further behind.

While average prices are on the rise, there remains variability across the country. Experts are still advising those looking to buy to be aware of the stability of the areas they are looking in and if you have options, do your research on these areas before committing to buy. Not all markets rise equally, and with variations in areas such as mining employment, drought impacts and trends in location preferences, some markets are more variable than others.

The downside of a low cash rate means interest rates on your savings accounts are also impacted in the same way, so if you’re living off interest rates from money sitting in the bank it may be worth sitting down with a financial adviser and seeing what other options are available to you. A lower cash rate also means we are expecting to see a lower-performing Australian dollar. This will have an impact on areas such as businesses importing goods and currency exchange rates. See our article on 9 keys to successful investing.

 

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How can First Home Buyers Benefit?

The lowered cash rate puts many people wanting to buy their first home in a position to do so now instead of waiting to save more, as it may be easier to get approval for the loan they are seeking or a higher loan, especially if they are able to use the First Home Owners Grant (vi)

While housing affordability seems more doable now with low rates, it is very important to consider the implications of a rate rise. While not predicted in the near future, home loans generally live for many years. Considering a fixed-term mortgage may take some stress out of that equation.

At Invest Blue, we work with a large number of lenders and are committed to providing you with the highest level of service. Contact us today to start your discussions around lending.

 

What are the gaps in current interest rates offers and what to look for?

The current average household is on a variable interest rate sitting at roughly 5.5% with an average loan size of $440,000. With the current 0.75% cash rate we are now seeing variable interest rates for as low as 2.80% (ii). That gap of 2.61% may not seem like much, but it can make a huge difference.

If we run a comparison on the average loan size of $440,000 at 5.5%, you are paying $24,200 per year in interest. Compare that to the now lowered 2.89%, you would be paying $12,716! There is the potential to save $11,484 per year on interest, nearly 50%. Talk to an adviser today or contact our lending team to talk about refinancing your loan. Now is a great time to refinance.

At Invest Blue, we have a dedicated Lending Team as well as our Advice Team. Our Lending manager Geoff Murray reports “There are many additional factors which can contribute to the interest rate you will be able to secure, such as loan size and credit rating. The rate offered by the big banks also isn’t the rate you may be offered, often there is room for negotiation. It is recommended to see a mortgage broker who will be able to compare thousands of loans and find the right one for you and the best rate”. If you are wondering what a broker does and if you are better off looking into this yourself, check out our article on this subject here.

Bank loan comparison based on a variable $440k loan fixed for 5 years

Lender Interest Rate Comparison Rate Monthly Repayment
Athena 2.84% 2.80% $1817.31
Ubank 3.09% 3.09% $1876.49
ANZ 3.53% 4.46% $1983
NAB 3.69% 4.55% $2022.76

 

If your current rate was negotiated more than two years ago, refinancing might be something to consider. There are many things that can affect your decision to refinance, and you may also be unable to if you are already in a locked-in a contract. If you are considering refinancing, explore our article on “when refinancing makes sense”.

 

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How can you benefit from refinancing?

As demonstrated there may be a potential saving of $11,484 per year on interest on the average size home loan. If you can secure this all-time low rate and save, how can you make the most of the savings?

Perhaps you can do those renovations that could further improve the value of your property. You could make additional repayments on the loan to increase equity and save interest expenses over the long term. You might decide to invest the savings so that cash is earning interest and your savings are getting the beneficial boost of compounding over time. Or, you might decide to take an invaluable family holiday or spend upon another big dream.

Your financial planner can also help make the right decision dependant on your situation. The most important thing is to make a clear plan on what you want to do with your savings, and budget accordingly. Our team will be happy to discuss your refinancing options and recommend you to a trusted mortgage broker. Speak with us today.

If you are seeking a bigger picture view of your finances, and want to move towards your best possible life, contact us so we can put you in touch with a Financial Adviser.

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.

i) RBA rates history https://www.marketindex.com.au/rba-cash-rate
ii) loan comparison https://www.canstar.com.au/compare/home-loans/?profile=Buying+Next+Home+500k&amount=440000&purpose=Refinance&repayment_type=P%2BI&state=NSW&Loan+Type=Variable&provider_link=Yes,+just+compare+results+with+links
iii) RBA rate drop, why
https://www.theguardian.com/australia-news/2019/oct/01/reserve-bank-cuts-interest-rates-to-historic-low-of-075-to-boost-flagging-economy
iv) Cash rate to drop further https://www.afr.com/policy/economy/rba-to-slash-cash-rate-to-0-5-per-cent-fiscal-calls-mount-20190927-p52vjp
v) Donald Trump https://www.businesslive.co.za/bd/world/americas/2019-10-02-gadfly-catches-donald-trumps-eye-with-support-for-lower-interest-rates/
vi) First Home Buyers https://www.smh.com.au/money/saving/first-home-buyers-the-biggest-winners-from-rate-cut-20190514-p51n7j.html
vii) https://www.news.com.au/finance/economy/australian-economy/housing-market-australian-house-prices-increased-by-08-in-august/news-story/5a34f641e86f48cacb3bf5f03b70fc80