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On Tuesday, 3rd November 2020, the Reserve Bank of Australia (‘RBA’) cut interest rates from the previous record low of 0.25% to a historically low 0.1%.

This has been done in hopes to help the country recover economically by supporting household spending through lower interest costs for borrowers.

Whether you are a homeowner paying off mortgage, or you are in the market to buy a property, understanding how the cash rate affects interest rates is important.  Depending on how a lender responds to changes in the cash rate, will directly affect how competitive their loan product is in the market.  We explore what it means for homeowners, first home buyers and savers alike.

What impact will it have on my home loan?

When the RBA reduces the official cash rate, lenders usually pass on the cut to borrowers, however they may not pass on the entire benefit. If you already have a home loan, you can choose to continue to pay the same amount into your home loan, but as your interest cost is lower, you will pay down your home loan balance faster.  Alternatively, you can reduce your monthly loan payments to free up cashflow for other goals.

It is important to bear in mind that many lenders choose not to pass the rate cut on in full. It is worth shopping around to ensure that you are getting a competitive deal which suits your goals and objectives. If your current bank is not willing to negotiate, refinancing with another bank may be an option if they offer more competitive terms and better features.

What about if I’m a First Home Buyer?

For first home buyers, an interest rate cut may mean it is easier to get your foot into the property market. As interest costs on a loan will be lower, you may be able to borrow more.

You can check your borrowing power with our online calculator. By entering your income and expenses, it will generate an approximate maximum loan amount that you could apply for. *

And what about our savings?

Unfortunately, your savings account will also be impacted by interest rate cuts. When banks reduce the rate of interest they charge to borrowers, they also reduce the rate of interest they pay on savings accounts. You can compare how much interest you’ll receive with the adjusted interest rates with our online calculator. *

If you have a home loan, you might consider an offset account. With an offset account, your savings offset the interest charged to your home loan, which means you are effectively paid the same rate of interest on your savings as you pay on your home loan.

Speak to one of our award-winning brokers to discuss how interest rates changes might affect you, and your options to take advantage of lower interest rates. Contact us on (08) 9367 4222  or email [email protected]. Alternatively, you can book a free consult here.

* Please note:  these calculators do not take into account your personal goals, objectives and circumstances, and are indicative only.  The calculations do not constitute professional advice and should not be relied upon for the purposes of entering into a financial commitment.