RBA cash rate decrease
When the RBA cuts the cash rate then interest rates go down: that's good for home loans and bad for savings accounts.
- The Reserve Bank has made a second cash rate cut in March 2020 as part of an emergency response to the COVID-19 pandemic. Learn more here.
The Reserve Bank of Australia sets the official cash rate, which is the interest rate for overnight loans provided to banks. The cash rate has a big effect on your home loan and savings account interest rates. A decrease in the cash rate typically means:
- 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.
- Savings account interest rates go down. This is bad news for savers. A lower interest rate means you earn less interest on the money in your bank account.
Read on to learn more about how rate cuts affect your financial situation and what you can do to get a better deal.
I have a mortgage: What does an RBA cash rate decrease mean for me?
There are several things to keep in mind:
- Only variable rate mortgages are affected by the cash rate. If you're locked into a fixed rate loan, you'll have to wait until the fixed rate period ends before you can take advantage of lower rates.
- Lenders are not obliged to pass on the RBA's cut. Some lenders pass the full cut on immediately, dropping their rates the day the Reserve Bank announces their decision. Others wait a while, and some may only pass on part of the cut.
Here's what you need to do
If the RBA cuts the cash rate and you have a variable mortgage, here's what you should do:
- Check the interest rate on your home loan. Is it competitive? Are better deals available?
- Check if your lender plans to pass on the rate cut.
- If not, ask your lender for a better deal anyway (it never hurts to ask).
- Regardless, start comparing rates on the market and look for a better deal.
- Once you've found a better rate apply for the new loan. There's some paperwork involved but once accepted your new lender will take care of the switching for you.
Potential savings from a cash rate cut
Let's use a real life example from June 2019. Say your mortgage had an interest rate of 3.59%, but then the RBA cut the cash rate on June 4. Your lender passed on the full cut, so your interest rate dropped to 3.34%.
How much does this save you? Well, assuming you're on a 30 year loan and you've borrowed $400,000, your monthly repayments would shrink from $1,816 to $1,760. That's a saving of $56 a month or $672 a year.
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I have a savings account: What does an RBA cash rate decrease mean for me?
If you’ve got money tucked away earning interest in a savings account, an RBA cash rate decrease may not be the news you’ve been hoping for. A lower interest rate means you earn less interest.
Here's what you need to do
- Start by checking if your lender is lowering your interest rate (they might not be).
- Compare your interest rate to other rates on offer. There are still some accounts offering generous rates.
- Consider if it's worth switching to a more competitive offer.
If your funds are locked away in a term deposit, you won’t feel the effect of the rate decrease until your deposit matures and you can access your funds. Of course, the fixed nature of a term deposit means you won’t be able to enjoy the benefits of any rate hikes should they occur.
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