Article by Patrick Lynch, Head of Operations
On Tuesday 3 Nov., we had the Melbourne Cup and Reserve Bank of Australia monthly meeting:
- If you backed Twilight Payment in the horse race – congrats!
- If you backed the Reserve Bank to reduce the cash rate – double congrats!!
At their meeting, the RBA decided on a number of measures to further support the Australian economy including a reduction in the cash rate from 0.25% to 0.10%. It also interestingly stated “the Board is not expecting to increase the cash rate for at least three years”.
So, what next?
For borrowers with the Big 4 Banks (ANZ, CBA, NAB and Westpac/ St George/ Bank of Melbourne), the rate cut won’t flow through to lower variable home loan rates. Interest rates were already at historic lows, so the scope to go lower on variable was limited. However, given the RBA comments on future cash rate movements, the Banks were able to offer new, significantly improved lower fixed rates, some below 2% and particularly for longer terms.
If you have an offset account, your effective variable rate is more relevant:
- $500,000 variable home loan at (say, for simplicity) 3%
- Interest cost is $15,000 p.a
- If you have $200,000 sitting in offset, you are only paying interest on $300,000
- Interest cost is $9,000 (($500,000 – $200,000) x 3%)
- Effective interest rate is 1.80% ($9,000/ $500,000)
There are Lenders other than the Big 4 – some second-tier Banks and non-Bank Lenders have reduced their variable rates, with more announcements due. The danger in being a rate chaser is these institutions don’t always have all the options (e.g. policy constraints, product constraints, limited loan to value ratio, max loan sizes, no branch network, limited mobile/ internet banking capability, etc.).
What can I do?
Now might be the time to consider refinancing (if your circumstances allow) or fixing.
- We’ve set out some of the reasons for refinancing (other than just a cheap rate) in this article.
- We’ve also given our thoughts on the fixed vs. variable conundrum here.
Whatever you queries, speak with us first – we can provide more information, run some pricing requests with the Banks to optimise your outcome, etc. As always, we’re here to help.
Long Property blog content provides general information only and has been prepared without taking into account your objectives, financial situation or needs. We recommend that you consider whether it is appropriate for your circumstances and your full financial situation will need to be reviewed prior to acceptance of any offer or product. Nothing on the Long Property website constitutes legal, tax or financial advice and you should always seek professional advice in relation to your individual circumstances.
