On Tuesday, there was many cheering home the winner of the Melbourne Cup – but there was also much celebration amongst Hamilton homeowners and investors, thrilled that the Reserve Bank of Australia (RBA) had cut the cash rate once again.
While it’s well understood that an interest rate cut is a good thing for someone with a mortgage, recent news reports indicate that more than 85% of Australians don’t know what the current cash rate is actually is – and more than half think it’s higher than it is.
What this means is that around 16 million Australians are at risk of missing out on genuine savings when it comes to paying off their mortgage – all because they don’t know the current cash rate (it’s 1.5% by the way.)
Obviously, if this is you, you are certainly not alone. But now’s the time to get educated, and reap the benefits.
Ok then. What does the term ‘cash rate’ refer to?
The cash rate is the interest rate on overnight loans provided to banks. Banks lend each other funds on an overnight basis to meet their daily cash needs, and the cash rate is the interest rate they pay.
On the first Tuesday of every month, except January, the RBA board meets to set the cash rate and discuss monetary policy matters. (This guarantees that the Melbourne Cup and the November RBA Interest Rate Announcement will always be on the same day.)
When the RBA changes the cash rate, there will always be economic impacts. It can influence the interest rate on your mortgage, the amount of interest your savings might earn, as well as having other implications for consumer spending, investment, inflation (the increase in the prices of goods and services over time) and employment.
When the economy is strong, the RBA might decide to raise the cash rate to ensure inflation remains within an optimal range (the current consumer price inflation target for Australia is between 2-3 percent, on average, over time). When the economy is weak, the RBA might lower the cash rate to stimulate the economy and encourage spending – essentially, to put a little more money in the pockets of homeowners, so they can spend it and keep the economy going well.
So a lower cash rate means my mortgage payments will automatically drop?
Hmmmm… not necessarily. Banks take into account the cash rate when setting their home loan interest rates. A change in the cash rate may be passed on to variable rate mortgage holders – although there’s no promises that’s what will happen. For example, if you have a fixed home loan, you aren’t impacted by a change in the cash rate.
For borrowers whose banks do pass on cash rate cuts, it can mean big savings. Even small interest rate changes can result in large reductions to home loan repayments and good savings in interest over the course of the loan.
If you’re a new borrower, the cash rate cut means we may be able to find you a more competitive mortgage than what we may have been able to line you up with in the past.
That’s why now is a good time to consider refinancing
So far this year, there have been three cash rate cuts from the RBA. Some banks have passed on bigger rate cuts than others, so if you have had your mortgage for some time it could be worth reviewing it.
Start by checking if your lender has passed on the recent rate cuts. Better yet, we can check it for you! Next, have a chat with your broker to see whether your current interest rate is still competitive. That’s what we are here to do.
Popular reasons to refinance
- To score a better interest rate.
- To add features like an offset account or redraw facility to your loan structure to reduce the amount of interest you pay.
- To set up a line of credit or access equity for renovations, additional properties or other financial goals.
- To consolidate debt. This is where you roll all your debts into your home loan or take out a personal loan to pay off your debts.
- To shop around for a new loan if your fixed rate term recently ended.
Basically, if you aren’t in the loop about what the cash rate is, and what your lender is offering you, you stand to lose money. Our job, as a Mortgage Broker, is to provide you with the education and support necessary to efficently and cost-effectively navigate the property buying and ownership landscape.
We love what we do, so if you aren’t sure, or if you know you need more help, contact us.
