On November 3rd, the Reserve Bank of Australia (RBA) announced a record low interest rate cut that reduced the cash rate to an unprecedented 0.10 per cent.
A rate cut can prove beneficial with home financing, but the impact depends on what type of mortgage the client has, whether its a fixed or variable interest rate.
What is RBA cash rate?
Before diving into the pros and cons of the interest rate drop, let’s first understand what RBA cash rate is and how it affects your mortgages.
The cash rate refers to the interest charged by a central bank – such as the RBA – to commercial banks for loans.
Put simply, it is the base interest rate which banks pay to borrow funds from other banks.
The Reserve Bank of Australia is responsible for adjusting the cash rate depending on the overall market conditions.
How does it affect variable interest rates?
It’s important to note that just because RBA announced the rate drop, all lenders need not lower their interest rates.
In fact, lenders are allowed to pass on only a portion of the rate cuts, which means that your bank’s interest rates will vary from another bank.
If you’re on a fixed-rate home loan, that means you’re locked into that interest rate for a set period and the rate drop won’t affect you.
However, if you have a variable rate, you might want to consider your loan terms and see if you can get a better deal at a lower interest rate.
You can get a better deal by refinancing. To read more about this, visit our refinance page.
What are the pros?
- It’s not a bad idea to consider refinancing your mortgage when interest rates are low, and right now, they are plummeting.
- Low rates can be good for potential homeowners; variable interest rate mortgages move directly with the RBA’s rate changes.
- Assessment rates could change with the interest rate. Low rates mean improvement in the borrowing capacity.
- Variable mortgage interest rates go down. This is good news if you have a home loan. A lower rate on your mortgage means your repayments get cheaper or if you maintain the same repayment, the loan can be paid off faster.
What are the cons?
- You may end up paying too much on closing costs. If you’re on a fixed rate home loan, then you have to pay break costs.
- Winding up with a higher interest rate because you don’t want to pay closing costs.
- Losing equity on a cash-out refinance, and lowering your net worth.
- The fixed interest rate on your home loan does not change.
- Savings account interest rates go down. This is bad news for savers as a lower interest rate means you earn less interest on the money in your bank account.
What does interest rate drop mean for me?
The interest rate drop is not for you if you have a fixed-rate home loan as you’ll have to wait until the fixed-rate period ends.
However, that doesn’t mean that variable-rate mortgages are affected by the rate drop as well. Not all lenders have passed on the full rate cut on their variable home loan products.
Even the big four have not yet passed on the rate cut.
Keep updated with your bank to check if they’ve passed on the rate cut and dropped their interest rates.
If they have, you can choose to benefit from the current lower rate or opt to refinance your loan at a fixed rate.
Even if your interest rate has dropped, you can choose to keep maintaining the same repayment and pay off your home loan faster.
Golden tips from our mortgage brokers
- RBA has said it doesn’t expect to increase the cash rate for at least three years. So, you might want to consider fixing your home loan. If you’re wondering whether to fix or not to fix, you might want to look at the pros and cons of fixing your home loan.
- If the term of your fixed-rate mortgage is about to end and your rate will revert to a relatively higher interest rate, it’s a good idea to shop around.
- Lenders are likely to offer discounts or cashback to ward off competition. Keep an eye out for them.
- Assessment rates could change for certain lenders. Lower assessment rates mean slight improvement in your borrowing capacity.
Do you need help?
Not every lender will lower rates on their home loan packages. However, our mortgage brokers are updated with lender rates and offers of over 50 lenders on our panel.
Whether you’re refinancing or pondering over getting a fixed home loan, our mortgage brokers are here to assist you. Call us on 1300 889 743 or fill in our free online assessment form to discuss your options and how you could benefit from the rate drop.