While the Reserve Bank’s decision to cut interest rates will be good news if you’ve got a mortgage, it’s not so welcome for some Aussies.
The Reserve Bank cut the official cash rate today to an all-time low of 0.10 per cent from 0.25 per cent.
This effectively takes the cash rate to near negative interest rates on Melbourne Cup day.
Treasurer Josh Frydenberg has said that while the Reserve Bank’s decision to cut interest rates today is good news for households, businesses and people with mortgages, it could mean “tough news” for other Aussies.
The treasurer said that while the cut is “good news for borrowers” – whether they’re small businesses or households and families with a mortgage – he added it’s “also tough news for savers who have put money in the bank”.
“For someone with a $400,000 mortgage, the average across the country, what we have seen with today’s announcement where it has come from down 75 basis points to just 10, that is worth $1,000 a year for someone with a mortgage that size,” Mr Frydenberg said.
“That being said, the banks, no doubt, will look for other ways to pass on this lower cost of borrowing for them, whether it’s for small business loans or whether it’s for fixed mortgage rates as well.”
The treasurer expects the banks to pass it on in full but the major banks are yet to announce changes.
Many economists predicted the cut after the RBA kept the interest rate at 0.25 per cent in October on Budget day.
The RBA, which meets on the first Tuesday of every month where the board makes a decision on interest rates, has reduced the rate six times since 2016.
The rate was dropped to a historic low in March this year due to the COVID-19 pandemic.
Market analyst Kyle Rodda told news.com.au that a rate drop today was “expected” and would be good news for homeowners and homebuyers.
He said the cut would lower mortgage rates and support household spending by lowering the cost of debt. “It should also push the banks to lend more and should also stoke an increase in investment,” Mr Rodda said.
Mr Rodda said the cut means borrowing will become “that little bit easier”, while there’ll be “a bit of extra money in the pocket from lower interest repayments”.
“For a business, finance ought to become more available, while on a grander scale, it should make investing in certain projects more viable,” he explained.
Graham Cooke, insights manager at Finder, said the November rate cut would have been seen as “unprecedented” only a few months ago.
However, a recent Finder study showed that 29 out of 43 economic experts, or almost 70 per cent, predicted a cash rate cut today.
“For the first time since 2011, the RBA has declared a Cup Day cut despite some skepticism from experts around the effectiveness of further monetary stimulus measures,” Mr Cooke said.
“But significant considerations like the strength of the Australian dollar and a lagging Victorian economy have supported the case for further easing.
“I suspect the horse races weren’t the only thing punters were betting on today,” Mr Cooke said.
Mr Cooke said recent comments by RBA deputy governor Guy Debelle indicated that Australia may already be heading for economic growth after six months of recession.
A lower cash rate means borrowing money is cheaper, which is good news for people with mortgages. The low rates this year are also spurring homebuyers to enter the property market.
Mr Cooke added that a rate cut could mean big savings from lenders who pass on the reduction to customers.
An average mortgage holder could save $15,000 if banks pass on the cut.
“For mortgage holders, another rate reduction will be welcome news – even a cut of 15 basis points could save the average home loan customer around $500 a year in interest,” he said.
“Now is not the time for homeowners to be complacent. If the rate cut goes ahead and your lender doesn’t pass on the savings, it’s time to refinance to a more competitive deal.”
If a homeowner with the average mortgage of around $480,000 were to drop from the current average variable rate of 3.99 per cent to 3.84 per cent, they would pocket an extra $495 per year. Over the course of a 30-year loan, this would save them almost $15,000 in interest.
According to Dr Andrew Wilson of My Housing Market, Australia’s economy is turning a corner.
“Recovery has proved more positive than expectations, and will continue to surprise on the upside with the reopening of borders fuelling a tourism and hospitality surge,” he said.
John Rolfe of Elders Home Loans agrees, stating that “the underlying indicators are strong for Australia to lead the world in a recovery”.
Peter Boehm of CLSA Premium also said it was good news for the economy.
“Now that this has been announced, and states are showing reasonable signs of economic recovery – other than Victoria – further easing of monetary policy will likely be supported by the RBA,” Mt Boehm said.
CreditorWatch chief economist Harley Dale agreed that reducing the cash rate was a “widely expected move” that will give mortgage-holders a boost.
He added the interest rate cut “will have a positive impact on the Australian economy”.
“The RBA is now out of ammunition in terms of the official cash rate,” Mr Dale told news.com.au. “Any further support the Australian economy requires will have to come from fiscal policy and quantitative easing – but then fiscal policy has been doing most of the heavy lifting in 2020,” he added.
“While it can be argued that this latest interest rate cut will do little to stimulate demand, it will likely feed through to lower fixed-rate mortgages. That can provide a powerful charge to the economic recovery,” he said.
“A 15 basis point cut probably won’t do much to stimulate demand overall, but if at least some of the cut is passed on to mortgage rates, then it will help boost a residential property market that already appears to be in recovery mode,” he told news.com.au.
“The housing market has a broad reach into other areas of the Australian economy and so the boost a cut would provide should not be underestimated,” he added.
This article was originally published by Kathy Skantzos for news.com.au and can be read in full here.