Earlier this month, the Reserve Bank of Australia dropped the cash rate to a record low of 0.50% after a week of growing concern over the coronavirus. The decision was made to support the economy after the share market fell by more than 10%.
Analysts and economists have predicted two rate cuts for 2020 as early as 2019 amidst growing concerns over the unemployment rate which currently is hovering at 5.3%, the persistently low inflation and weak wage growth at a record low of 2.2%.
The RBA needed to stimulate the economy and spending. There is also the fear of a recession which Australia has not experienced in the last 27 years. Recession is defined as two quarters of negative economic growth.
In these uncertain times, who are the winners and losers of the drop in the cash rate?
What does the rate cut mean for home buyers?
The Australian property market is currently experiencing a recovery especially in Sydney and Melbourne.
The drop in cash rate may push house prices further up and this is not good news for first home buyers who are experiencing difficulty just saving for that minimum 5% deposit. But the lower interest rate may mean savings in their repayment making their mortgages more affordable.
The low rate can also increase interest from property investors who were sidelined from the property market in the last 3 years. Property has been seen by many Australians as a safe haven compared to the volatility of the share market.
What does the rate cut mean for those with mortgages?
Many Australian banks are passing on the full rate cut of .25%. This includes the big four banks – ANZ, CBA, NAB, and Westpac. A number of 2nd and 3rd tier lenders have also announced dropping their standard variable rates by .25%.
Those with mortgages should speak with their banks and start negotiating to get a better deal. An average mortgage holder on a $400,000 loan can save around $56 a month if their interest rate drops by .25% for a 30-year loan term.
I am now seeing fixed rates starting at 2.59% so if your current rate starts at 4%, have a chat with your lender’s home loan advisers and find out if they can bring your rate down. A 1% drop in your interest rate can save you $5,000 annually for a loan amount of $500,000.
Remember that lenders are fighting for your business so if you feel that your bank is neglecting you, start speaking to a mortgage broker to get you a better deal.
What does the rate cut mean for your savings and deposits?
Savings and term deposits move in line with the RBA cash rate. In this instance, the rate drop will result in a decrease in interest rates for your savings and term deposits. Retirees relying on the interest of their savings are not happy with the rate cut and so are those saving for their first home deposit.
Interest rates look like they’re staying low in the foreseeable future. If you have a mortgage, now is the time to take advantage of the low rates and focus on paying off your home loan.
If you are a first home buyer, it is a good time to speak to a broker to discuss your borrowing capacity and whether you’re ready to jump into the property market.
The Australian market remains strong and resilient despite the challenges it faced from the recent bushfire, floods, and the coronavirus.