New low puts borrowers on a $21,000 high
- New 1.25% cash rate could see borrowers pocket $21,000 over the life of their mortgage
- Home loan sizes to swell as cash rate fast approaches 1%
- How to take action following today's rate cut
4 June, 2019, Sydney, Australia - In a widely predicted outcome, Australian borrowers were granted a cash rate cut to 1.25% today – a move that broke the mould of the Reserve Bank of Australia's (RBA) hold strategy of almost 3 years.
The central bank slashed the cash rate by 25 basis points which was correctly predicted by 91% (32/35) of panellists from Finder's RBA Cash Rate Survey, who cited a spike in unemployment and below-target inflation as contributing factors.
This is the first time the cash rate has reached this level since it was first regulated in 1990.
The easing of monetary policy will likely continue throughout the year with most experts (59%) anticipating 2 rate cuts in 2019 and 1 in 5 market analysts (22%) predicting 3 rate cuts this year.
Graham Cooke, insights manager at Finder, said a 1.25% cash rate is groundbreaking.
"This is uncharted territory for us and if 2 more rate cuts are enforced this year, we could potentially see a rate of 0.75% which is unheard of in Australia.
"It's almost hard to fathom what it was like for borrowers 11 years ago with a 7% cash rate, let alone the 17% cash rate back in 1990," he said.
CEO of Lateral Economics, Nicholas Gruen said the rate will drop with the election out of the way.
"[The RBA's] last set of minutes made up excuses not to cut during the campaign. They should cut by more [than 25 basis points], but I doubt they will," Gruen said.
Home loan sizes set to jump
Should historical market behaviour continue, Finder expects the average home loan size of $384,700, according to the Australian Bureau of Statistics (ABS), will increase following this cut, as it has in the month following 8 of the last 10 rate cuts.
"The average home loan size increase following the last 10 rate cuts was 1.3%. This could add almost $5,000 to the average size of home loans nationally," Cooke said.
Cooke said the rate cut is just one of a number of changes that will likely increase mortgage demand.
"In recent weeks we've seen auction rates bounce back in many states for the first time in months.
"With interest rates dropping, and loans becoming both cheaper and easier to attain, this could very well be the turning point for the slumping housing market.
"However, these previous cuts occurred in environments where house prices were increasing, so we'll have to wait and see how the market responds this time," he said.
How to take action
Cooke said now is the time for borrowers to take matters into their own hands to ensure they get a better deal on their existing loan.
"We'll all be watching the banks, particularly the Big Four, to see how – and how quickly – they respond to today's news.
"While many lenders may pass on a cut to their customers, you may not see the full 25 basis point cut applied to your loan. Keep an eye on your lender's website and digital channels to see how it's responding to the rate cut and how this will affect your mortgage.
"If you're not satisfied, don't settle – this environment makes it a great time to go home loan shopping," Cooke said.
Potential to save thousands
The average home loan size in Australia is $384,700, while the average variable rate sits at 4.91%. A reduction of 25 basis points to 4.66% could lead to a savings of almost $700 per year, which is equivalent to almost $21,000 over the life of your loan.
Alternatively, if the average Aussie chose to continue paying down their mortgage at their previous rate this could shave almost 2 years (22 months) off their loan term, meaning they could become mortgage-free sooner. In addition, they could pocket around $43,000 in interest saved.
Potential savings based on mortgage sizes
|Mortgage size||4.91%||4.66%||Monthly savings||Annual||Savings over 30-year loan term|
|monthly repayments||monthly repayments||savings|
Source: Finder, ABS. Based on the average variable rate of 4.91% across all lenders measured and a drop of 25 basis points to 4.66%
If you're open to using a smaller lender, switching to a 4.00% rate could save you $200 a month and nearly $75,000 over 30 years.
Finder currently has more than 30 home loan rates below 4.00%.
Meanwhile the lowest variable rate is 3.29% (Mortgage House Home Loan Prime), while the lowest overall rate in market is a record-low 2.99% (Greater Bank; 1-Year Fixed).
Cooke said borrowers are in a prime position to choose from a vast range of options.
"Use online resources such as a repayment calculator or a switching cost calculator to forecast your calculations so you make an informed decision.
"We're talking record low rates and the potential to save thousands of dollars," Cooke said.
Stay updated on which banks have reduced home loan rates on this page.
*Average mortgage in Australia as of Nov 2018 (most recent ABS data)
Here's what our experts had to say:
Alison Booth, ANU (Decrease): "The Governor of the RBA has more or less announced there will be a fall. It is clear that the RBA were considering it before the election but for political reasons did not, as it would not do to be interpreted as a signal favouring either major party. The economic fundamentals now warrant a small change. Whether or not the banks follow through with a cut in their rates remains to be seen."
Andrew Reeve-Parker, NW Advice Pty Limited (Decrease): "Spike in unemployment numbers will give the RBA confidence to move on interest rates."
Ben Udy, Capital Economics (Decrease): "The labour market has now joined the deterioration in the rest of the economy."
Christine Williams, Smarter Property Investing (Hold): "Our employment is steady."
Clement Tisdell, Economist (Decrease): "Statements by the Reserve Bank Governor."
David Robertson, Bendigo and Adelaide Bank (Decrease): "Latest jobs data slightly weaker, in contrast to RBA expectations in their SOMP, so (as indicated in Philip Lowe's recent speech) enough reason for some fresh monetary stimulus."
Debra Landgrebe, Gateway Bank Limited (Decrease): "This view is based off recent comments by the Governor of the Reserve Bank that indicated a shift towards quantitative easing."
Dr Andrew Wilson, My Housing Market (Decrease): "RBA has clearly signalled its intention to cut rates and with its nominated sensitivity measure of unemployment now on the rise is set to act. The release of the ABS GDP data for the March quarter the day following the rate announcement will encourage the Bank to cut to be seen to be acting to stimulate the economy ahead of what is likely to be yet another underwhelming result for the economy."
Geoffrey Harold Kingston, Macquarie University (Decrease): "Reiterating my last response, the RBA should cut by 25 basis points this Tuesday. Breakeven inflation is just 1.2% p.a. and f/t employment growth was negative in the last ABS survey."
Jacqueline Dearle, Mortgage Choice (Decrease): "There is no question that cash rate cuts are on the cards this year and there's enough evidence to suggest that the first rate cut will occur in June. We have seen some deterioration in the labour market, with the ABS' most recent Labor Force data revealing the unemployment rate grew to 5.2% in April. The stubborn inflation rate is sitting at 1.3%. The combination of these key economic measures suggests a decrease to the cash rate would be appropriate this month."
John Caelli, ME Bank (Decrease): "It's likely the RBA will cut the cash rate in June due to an ongoing combination of factors, in particular, some weakening in employment growth, weaker GDP data and the below target inflation rate."
John Hewson, ANU (Decrease): "Economy slowing faster than they thought."
John Rolfe, Elders Home Loans (Decrease): "The RBA announcement this week has confirmed that unemployment sub 5% with low inflation can support at least 50 bps off rate cuts."
Jonathan Chancellor, Property Observer (Decrease): "The board has observed the Australian economy has slowed."
Leanne Pilkington, Laing+Simmons (Decrease): "The Governor flagged a cut and there's little point postponing what the RBA deems inevitable. With prices approaching the bottom of the cycle, interest rates potentially declining further, and an easing on lending restrictions, the signs point to the emergence of a buyer's market in the residential sector."
Malcolm Wood, Baillieu (Decrease): "Lowe's speech guided to a rate cut – slowdown, lower inflation, rising unemployment, falling NAIRU and forecast assumes two rate cuts."
Mark Brimble, Griffith Uni (Hold): "Bias is clearly to the easing, however the RBA may choose to wait for the new financial year for a range of reasons including the finalisation of the budget bills (which get through and which don't) and how geo-political issues play out on the global stage and markets."
Mark Crosby, Monash University (Decrease): "RBA likely to cut on back of latest inflation number. Only possible alternative is that they announce a change to the inflation target, but this is unlikely without some more public discussion."
Mathew Tiller, LJ Hooker (Decrease): "Given inflation and wages remain stubbornly low, combined with a softer outlook for employment market. We expect the RBA to cut the official cash rate to 1.25% at its June board meeting. This rate cut combined with the return of a Coalition government, APRA easing lending restrictions and the new first home buyer deposit scheme will see confidence return to property markets and in-turn increase transaction activity."
Matthew Peter, QIC (Decrease): "The RBA has finally acted in a decisive manner, signalling its intent to cut the official cash rate at its June meeting. It is now incumbent on the RBA to give clear guidance on the future path of monetary policy beyond its June meeting."
Michael Witts, ING (Decrease): "Such a move is consistent with the recent comments by the Governor. The economy has the capacity to grow at a stronger rate and lower interest rates will achieve such an outcome."
Michael Yardney, Metropole Property Strategists (Decrease): "The RBA has backed itself into a corner. The latest unemployment stats should now force its hand."
Nerida Conisbee, REA Group (Decrease): "I've gone against popular opinion and have held off calling a cut until now. I think this month will be it. While there has been a lot of poor economic data coming out, it looked like the RBA were holding on to the low unemployment rate as a sign that things were about to improve. With the unemployment rate ticking up in April, I think this will be enough impetus to make a decision to cut."
Nicholas Frappell, ABC Bullion (Decrease): "A slight increase in unemployment and 'underemployment' added to the weak Q1 CPI figure, which was then compounded by a 1.90% fall in the Q1 'construction work done' number. Given that the election is behind us, and the RBA has evidence of both weak inflation and worsening jobs data, the RBA has scope to cut by at least 25 bp in June."
Nicholas Gruen, Lateral Economics (Decrease): "Their last set of minutes made up excuses not to cut during the election campaign. So they'll cut. They should cut by more but I doubt they will."
Noel Whittaker, QUT (Hold): "I am probably wrong but I think dropping would be a very bad policy – hope the bank realises that."
Peter Boehm, KVB Kunlun (Decrease): "My previous thinking was that interest rates would start coming down during the second half of the year. However, recent events strongly indicate a fall in rates will likely occur sooner than previously thought. Chief among these is the RBA Governor's public announcement that an interest rate cut is on the table at the next meeting. That's a pretty obvious indicator of where rates are headed and when. This announcement was predicated on a stuttering economy and the RBA's apparent view that the economy can support an unemployment rate below 5% and low interest rates simultaneously, without causing serious upwards pressure on inflation. Combine this with APRA's relaxation of the minimum 7% floor when assessing borrowers' capacity to pay, the returned Government's planned reduction in tax rates and calls for increased infrastructure spending, there is a clear expansionary focus which would be supported by reducing interest rates and consequently, the cost of borrowing."
Peter Haller, Heritage Bank (Decrease): "With inflation undershooting the target range, credit growth low and unemployment rising, now is the time for the RBA to provide some monetary stimulus."
Shane Oliver, AMP Capital (Decrease): "Growth has slowed, inflation has slowed well below target, unemployment looks like it is now starting to rise when it needs to be falling to get inflation back up and the RBA has recognised all of this (and moved to an easing bias)."
Stephen Koukoulas, Market Economics (Decrease): "Low inflation and weak economic growth."
Sveta Angelopoulos, RMIT University (Decrease): "Given the election results (and thus the policy implications), the proposed changes by APRA and the slight improvement in the housing market, this may be an ideal time for a reduced cash rate to have an effective impact on the economy."
Tim Nelson, Griffith University (Decrease): "Most recent comments have been around unemployment being targeted through expansionary monetary policy without impacting inflation."
Tim Reardon, Housing Industry Association (Decrease): "The accelerated downturn in new dwelling construction activity."
Other participants: Bill Evans, Westpac (Decrease).
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