Just how low will the cash rate go?

Posted: 25 June 2019 2:53 pm News

A young couple drinking coffee on their couch.

If the cash rate falls to 0.75%, borrowers could save almost $2,000 a year in repayments.

Last month, the Reserve Bank of Australia lowered the cash rate to 1.25%. This resulted in lower variable mortgage rates from many lenders, including the Big Four.

And there are more cuts to come. We know this because the RBA has been unusually upfront about it.

In a speech on 20 June, RBA governor Philip Lowe said it would be "unrealistic to expect that lowering interest rates by a quarter of a percentage point will materially shift the path we look to be on" and admitted "It is not unrealistic to expect a further reduction in the cash rate as the Board seeks to wind back spare capacity in the economy and deliver inflation outcomes in line with the medium-term target."

That's about as candid as a central bank can get.

Historically, the RBA rarely moves the cash rate up or down just once. There's typically a follow-up move or a sequence of moves within a few months.

Westpac chief economist Bill Evans is one of several economists to predict three rate cuts this year, which would bring the cash rate down to 0.75%. Yesterday, Evans changed his prediction for the next cut from August to July, stating that it was impossible to "deny the explicit signals provided in the Governor's more recent speech."

How will these rate cuts affect mortgages?

If the cash rate falls to 1% or 0.75%, Australian borrowers will be looking at much lower mortgage repayments: provided they're on variable rate mortgages and their lender passes on the full cuts.

In April, 3.59% was considered a competitive variable rate. But then the cash rate dropped last month. Some lenders passed on the full cut, and 3.59% became 3.34%. Another cut in July would bring that down to 3.09%.

A third cash rate cut (down to 0.75%) could theoretically see a variable rate mortgage fall to 2.84%. That's lower than anything on the market right now.

To see how cash rate cuts will affect your mortgage repayments, we can use an example home loan and a quick repayment calculation.

  • Loan amount: $400,000 (this is around the average Australian loan size)
  • Loan period: 30 years
  • Rate type: variable

Now let's see how monthly repayments change as the cash rate falls and the lender passes on the full cut:

Interest rate RBA cut Repayment
April: 3.59% No cut $1,816
June: 3.34% -0.25% $1,760
July: 3.09% -0.25% $1,705
August: 2.84% -0.25% $1,652

Those three cuts would result in savings of $164 a month or $1,968 a year.

But if you want to take advantage of lower rates, you may need to do some work. Your lender may not pass on the cuts, or you might be on a higher rate product without realising it. This is why it's important to check your rate regularly and compare it to other mortgage interest rates on the market. And if you're not getting a good deal, why remain loyal to a lender who isn't loyal to you?

Be sure to check out our RBA cash rate survey page, where we publish expert predictions on the future of the cash rate.

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