RBA cuts interest rates to record low of 1.50 per cent

On Tuesday 2 August, the Reserve Bank of Australia (RBA) slashed the official cash rate by 25 basis points to an all-time low of 1.50 per cent. This decision however was expected by a majority of economists and those in financial markets, following weak consumer price data during the March quarter.

The Board judged that “prospects for sustainable growth in the economy, with inflation returning to target over time, would be improved by easing monetary policy at this meeting.”

This comes as good news for homeowners and buyers looking to enter the property market with mortgage rates at their lowest point. Even though the big four banks of Australia are not passing on the full rate cuts to its customers, this is not swaying homeowners. Commonwealth, ANZ, Westpac and National Australia banks have passed on between 10 and 14 basis points of the cut to their mortgage rates, which is roughly half of the RBA’s 25-basis-point official rate cut.

Westpac is giving its borrowers who are paying off principal and interest a 14-basis point rate cut, whilst those on interest only will receive a 10-basis point rate cut. Commonwealth Bank is lowering its standard variable mortgage rate by 13 basis points, whilst ANZ will cut its variable rate by 12 basis points to 5.25 per cent which is the same as NAB, and slightly higher than CBA. NAB will only be cutting its variable mortgage and business loan rates by just 10 basis points. However, NAB and CBA customers will only benefit from the rate reduction on Friday 19 August, just over two weeks after the decision.

However, there are some banks that are passing on the full rate cut to its customers including Bank Australia and Bank of Sydney.

So what does this mean for those repaying a mortgage? If you have a mortgage of $300,000 with an average standard variable rate of 4.93 per cent and get the full 0.25 percentage points off your interest rate, this could save you nearly $50 a month, or $16,325 over the lifetime of your loan, which is a massive saving.

However, if this reduction in interest rates is spurring you on to buy property, then it is important to think long term and not overstretch your budget too far. You might be in a position to repay the interest back today, but will you still be in a position to do so if interest rates were to go up in a few years? This is something you need to consider, particularly if you buy a property off the plan that doesn’t complete for a couple of years. It’s better to buy comfortably within your budget then stretch this too far as you might see yourself in financial difficulty. We therefore recommend speaking to a Mortgage Broker to help you with this.

According to Glenn Stevens, “Recent data suggest that overall growth is continuing at a moderate pace, despite a very large decline in business investment. Other areas of domestic demand, as well as exports, have been expanding at a pace at or above trend. Labour market indicators continue to be somewhat mixed, but are consistent with a modest pace of expansion in employment in the near term.”

Inflation also remains relatively low and is expected to remain this way for some time due to subdued growth in labour costs and very low cost pressures in the world.

As well as helping fuel property demand, low interest rates have also been supporting domestic demand and the lower exchange rate since 2013 which is fuelling the trade sector.

This rate cut is thought to help spur on property demand with property prices rising moderately over the course of this year. This could help homebuyers and first home buyers in particular to finally get on the property ladder. It will also help boost consumer confidence in the residential property market, whilst sustain growth.

There is still a high demand for homes, especially in the Sydney Metropolitan area, with approximately 33,600 new homes required here each year to accommodate the population growth, according to the Department of Planning & Environment.

So is this the last rate cut we will see this year? A third of the analysts surveyed by the financial comparison website Finder expect more cuts, but probably not until 2017.
Published on 4th of August 2016 by Marty Stanowich
Marty Stanowich
Marty Stanowich

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