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The Reserve Bank of Australia cutting the rate to a historic low comes with warnings and advice to borrowers.
The cash rate had remained at 1.50% since August 2016, but the RBA had always said its next rate move would be an increase to the rate. But over recent months with the property market continuing its downturn there has been growing speculation that the rate would have to move down.
In his remarks after the announcement, RBA Governor Philip Lowe said the decision was made to “support employment growth and to provide greater confidence that inflation will be consistent with the medium-term target”, rather than a reflection on economic outlook.
Chief customer officer of Aussie, David Smith, said the rate drop did reflect the current subdued economic environment.
“Australia has enjoyed a run of almost 30 years of unbroken economic growth, but there are signs the economy is slowing,” he said. “A major concern for the RBA is that inflation recently fell to 1.3% – well below its target range of 2 to 3%.
“We believe the RBA is still confident our economy is on track to continue growing this year, however it’s not taking any chances. By trimming the cash rate, the RBA is hoping to give the economy an extra boost to keep it ticking along.”
Great deals for home loan borrowers
Following the RBA announcement, banks have been dropping their home loans rates. Smith suggested that borrowers talk to their brokers about their home loan rates at this time.
“A rate cut is a perfect prompt for borrowers to get in touch with their mortgage broker or lender and check they still have a competitive deal. With Australia’s cash rate now at a new record low, there has never been a better time to strike a great home loan deal,” he said.
With the falling cash rate, borrowers can save almost $60 a month on the national average loan amount of $400,000, according to Loan Market Group executive chairman Sam White.
“The record low-interest rate creates real opportunity for first home buyers, investors and refinancers, with house prices in Australia’s two major cities now at the same level they were in late 2015 to early 2016,” he said.
“This, coupled with the Coalition Government’s plan to help first home buyers save for a deposit, whereby FHB’s would only need a 5% deposit, brings overdue relief to those wanting to enter the housing market.”
He added, “Consumers that have been looking to re-negotiate for a more competitive rate, with additional loan features from their existing lender now have that opportunity to put them on notice.”
“Brokers have never been more important to everyday Aussies looking to enter the housing market, refinance or invest.
The Finance Brokers Association of Australia (FBAA) has welcomed the move and called on the big banks to pass on the full rate cut to borrowers instead of boosting their own profit margins.
“If the banks refuse to pass this on in full they will reveal they have learnt nothing from the royal commission process,” Peter White, managing director of the FBAA, said.
Warnings for home loan borrowers
But White also cautioned borrowers to keep their repayments at current levels to drive down debt.
“There is a temptation to spend the windfall including tax cuts and wage growth but I don’t think that’s the best strategy,” White said.
“Economic growth is flat, debt levels are high, the housing market is still declining and unemployment is static. When you add global factors into the mix there is cause for caution. Borrowers will effectively be saving for a rainy day if they keep their mortgage repayments as high as they can afford. It’s better to have payments in reserve if conditions deteriorate further.”
Eric Wilson, the CEO and founder of independent neobank Xinja, said while it’s tempting to borrow more in times of lower interest rates, borrowers should accelerate debt repayments if they can, to build a buffer against signs the economy is slowing.
“Lower rates are a sign the economy is slowing and there’s little or no inflation,” Wilson said. “On face value, lower rates look good for borrowers, or could be a signal to borrow more.
“But this is an opportunity to cut debt to ensure you’re in the best position to deal with a slowing economy and the possibility of lower jobs growth.”
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