The RBA has left the cash rate on hold at 0.25 per cent today which is where it’s likely to stay until at 2023.
The RBA will also keep its bond-buying program, announced in March as part of a package of policy measures, in place for an extended period.
The bond purchases are aimed at keeping long-term interest rates low, which will influence the interest rates paid by households and businesses.
The RBA stated that it “will not increase the cash rate target until progress is being made towards full employment and it is confident that inflation will be sustainably within the 2–3 per cent target band”.
Yet despite these record low rates a growing number of Australians are struggling to make their monthly repayments.
According to Rate City already 320,000 homeowners have been approved to defer their home loan repayments for up to six months.
That’s an estimated $3.3 billion in monthly repayments that won’t be made, according to the Australian Banking Association (ABA).
However, for households that can still make their mortgage repayments, record low interest rates are easing the burden.
Analysis from RateCity.com.au shows the average big four bank home loan customer is now paying $2,060 per month in repayments, that’s $188 less a month than May last year.
Monthly repayments now compared to a year ago on a $400,000 home loan
|Rate||Monthly Repayment||Monthly Savings|
Source: RateCity.com.au Notes: Rates are based on the average big four bank discounted variable rate in May 2019 with 25 years remaining for an owner occupier paying principal and interest.
Calculations are based on the average rate cuts passed on over this time.
Households fortunate enough to still have their regular jobs may actually find themselves better off, at least in the short-term.
As well as making lower mortgage repayments, some families are saving money on things like petrol, public transport, eating out, gym fees and childcare.
If a homeowner with a $400,000 loan paid an extra $100 a week for the next six months, they’d save around $3,500 in interest in the long run. This is based on the average owner-occupier rate on RateCity.com.au of 3.46 per cent with 25 years remaining.
RateCity.com.au research director Sally Tindall said,
“Some families are up against the wall financially. They need immediate relief on their mortgage and it’s good to see they’re getting it.”
“However, for anyone fortunate enough to be saving money during COVID-19, it’s worth thinking about putting this cash to good use.
“Paying down debts like credit cards or putting extra money into the mortgage can potentially save people thousands of dollars in the long term and see them debt free months earlier,” she said.
Lowest rates from some of Australia’s largest banks
|Bank||Lowest variable||Lowest 2-year fixed||Lowest 3-year fixed||Lowest 5-year fixed|
|ING Bank Australia||2.74%||2.09%||2.14%||2.54%|
|Bank of Melbourne||2.69%||2.19%||2.19%||2.69%|
|Bank of Queensland||3.32%||2.29%||2.35%||2.99%|
|HSBC Bank Australia||2.65%||2.25%||2.25%||2.60%|
Source: RateCity.com.au LVR and loan size restrictions may apply.
Tim Lawless, Corelogic, comments:
The cash rate was unchanged at today’s RBA board meeting, holding at the record low of 0.25%, which is where it’s likely to stay until at 2023.
The RBA has previously been clear that the cash rate won’t move higher until inflation is well within the 2-3% target range and labour market indicators are trending towards full employment, implying an unemployment rate around the 4.5% mark.
We will get some clarity on the RBA’s economic forecasts later this week, with the release of the Statement on Monetary Policy, however, earlier statements from the RBA have indicated unemployment is likely to peak around 10% in June and inflation could turn negative over coming quarters.
Arguably, it’s safe to assume neither of these indicators will be in a position to trigger an increase in the cash rate target for at least the next couple of years.
The cash rate setting translates to extremely low mortgage rates.
Average variable mortgage rates for owner-occupiers are below 3% while investor variable mortgage rates are in the low 3% range.
Fixed-term mortgage rates are even lower.
Such a low cost of debt is a key factor that should help to support housing demand as the economy emerges from the COVID-19 hibernation.
Additionally, we continue to see refinancing related activity across CoreLogic valuation platforms tracking at elevated levels relative to the same time last year as mortgagors seek out the most competitive interest rates available.
Despite such low-interest rates, along with unprecedented levels of stimulus, housing markets are experiencing a swift reduction in sales activity.
CoreLogic estimates for settled sales through April are down by around 40% over the month.
The sharp fall in sales activity align with weak consumer sentiment readings; with consumers uncertain about their household finances, employment prospects and the short-to-medium expectations of economic conditions, their willingness to make a high commitment decision such as buying or selling a home have been significantly negatively impacted.
Consumer sentiment plunged through April, recording the largest monthly fall on record.
The good news is, with Australia flattening the virus curve much more efficiently and effectively than expected, we are already seeing some states lifting social distancing policies which will hopefully see economic and housing market conditions improving sooner than anticipated.
Comments from the RBA:
At its meeting today, the Board decided to maintain the current policy settings, including the targets for the cash rate and the yield on 3-year Australian Government bonds of 25 basis points.
The global economy is experiencing a severe downturn as countries seek to contain the coronavirus.
Many people have lost their jobs and a sharp rise in unemployment is occurring.
At the same time, the containment measures have reduced infection rates in a number of countries.
If this continues, a recovery in the global economy will start later this year, supported by both the large fiscal packages and the significant easing in monetary policies.
Globally, financial markets are working more effectively than they were a month ago, although conditions have not completely normalised.
This improvement reflects both the decline in infection rates and the substantial measures undertaken by central banks and fiscal authorities.
Credit markets have progressively opened to more firms and long-term bond rates remain at historically low levels.
In Australia, the functioning of the government bond markets has improved and the yield on 3-year Australian Government Securities (AGS) is at the target of around 25 basis points.
Given these developments, the Bank has scaled back the size and frequency of bond purchases, which to date have totalled around $50 billion.
The Bank is prepared to scale-up these purchases again and will do whatever is necessary to ensure bond markets remain functional and to achieve the yield target for 3-year AGS.
The target will remain in place until progress is being made towards the goals for full employment and inflation.
The Bank’s daily open market operations are continuing to support credit and maintain low funding costs in the economy.
To assist with the smooth functioning of Australia’s capital markets, the Bank has decided to broaden the range of eligible collateral for these operations to include Australian dollar securities issued by non-bank corporations with an investment grade credit rating.
More details are provided in the accompanying market notice.
The Australian economy is going through a very difficult period and there is considerable uncertainty about the outlook.
Reflecting this uncertainty, the Board considered a range of scenarios at its meeting. In the baseline scenario, output falls by around 10 per cent over the first half of 2020 and by around 6 per cent over the year as a whole.
This is followed by a bounce-back of 6 per cent next year.
There has been a substantial, coordinated and unprecedented fiscal and monetary response in Australia to the coronavirus.
Without this response, the outlook would have been even more challenging.
These policies are supporting the economy right now and will help when the recovery comes.
They are supporting people’s incomes, maintaining the important connections between businesses and their employees, underpinning the supply of credit to businesses and households, and keeping borrowing costs low.
The deferral of loan and other payments is helping people manage their cash flows.
The Australian banking system, with its strong buffers of capital and liquidity, is also helping the economy traverse this difficult period.
In the baseline scenario considered by the Board, the unemployment rate peaks at around 10 per cent over coming months and is still above 7 per cent at the end of next year.
A lower unemployment rate than this is possible if the reduction in labour demand is accompanied by a larger reduction in average hours worked, rather than by people losing their jobs.
The Board also considered other scenarios.
A stronger economic recovery is possible if there is further substantial progress in containing the coronavirus in the near term and there is a faster return to normal economic activity.
On the other hand, if the lifting of restrictions is delayed or the restrictions need to be reimposed or household and business confidence remains low, the outcomes would be even more challenging than those in the baseline scenario.
These scenarios will be discussed in the Statement on Monetary Policy, to be released later this week.
In the various scenarios considered by the Board, inflation remains below 2 per cent over the next few years.
In the March quarter just passed, CPI inflation rose to 2.2 per cent, but it is expected to turn negative temporarily in the June quarter, due to falls in oil prices, the introduction of free child care and deferrals of various price increases.
Further out, in the baseline scenario inflation is 1 to 1½ per cent in 2021 and gradually picks up further from there.
Given this outlook, the Bank will maintain its efforts to keep funding costs low in Australia and credit available to households and businesses.
The Board is committed to do what it can to support jobs, incomes and businesses during this difficult period and to make sure that Australia is well placed for the expected recovery.
The Board will not increase the cash rate target until progress is being made towards full employment and it is confident that inflation will be sustainably within the 2–3 per cent target band.
Comments Mortgage Choice:
Speaking about the RBA decision, Mortgage Choice Chief Executive Officer Susan Mitchell said,
“Today’s monetary policy decision from the Reserve Bank comes as no surprise.
With the cash rate sitting at the effective lower bound, the only way to go is up but not before key economic indicators show sustained improvement.
“In a speech delivered on April 21st, Governor Lowe outlined the Bank’s key economic forecasts.
Lowe also indicated that the next move to the cash rate would be up, and the next move will not occur until we make sustainable progress towards the Bank’s goals for full employment and inflation,” said Ms Mitchell.
“The most recent data from the Australian Bureau of Statistics (ABS) revealed that the unemployment rate rose to 5.2% in March, however the data was collected before the pandemic was declared and major actions were taken in Australia.
Given that we are yet to see the full extent of the impact of the COVID-19 pandemic on the labour market, it would be reasonable to assume that the cash rate will hold for some time yet.”
“The housing market is proving resilient to the impacts of the COVID-19 pandemic.
While social distancing measures have dampened activity in the property market, dwelling values continue to grow.
According to the CoreLogic Hedonic Home Value Index, national dwelling values grew 0.3%, supported by a rise of 0.4% in Sydney but a fall of 0.3% in Melbourne.”
“A record low cash rate means we are seeing some of the lowest mortgage interest rates in history, which is driving borrowers in droves to chase better deals over new property.
Mortgage Choice home loan approval data reveals that over the month to April 2020, there was a huge uptick in the proportion of borrowers looking to refinance.
There was an increase in demand for refinance of over 16% for owner-occupiers and nearly 14% for investors.
We are also seeing a shift in the product type borrowers are opting for.
Mortgage Choice home loan application data reveals that demand for fixed rate home loans surged almost 8 percent over the month to April 2020 and application data from the first few days of May suggests that demand for fixed rate home loans is only set to increase.”
“As expected, consumer sentiment plummeted in response to the pandemic.
According to the Westpac-Melbourne Institute of Consumer Sentiment index, sentiment recorded the single biggest monthly decline in the 47 year history of the survey, taking the index beyond GFC lows.”
“Meanwhile, according to the NAB Monthly Business Survey, business confidence saw its largest decline on record and is now at its weakest level in the history of the survey. Business conditions also declined sharply in March, in response to the COVID-19 containment measures.”
“Borrowers are seeking certainty in an uncertain time and one way to achieve this is by locking in a low interest rate on their home loans.
While there are many great deals to be had at present, I urge borrowers who may be considering locking in a fixed interest rate to speak to an experienced mortgage broker first to determine whether it is the right decision for their needs.”
“I also encourage any borrowers who haven’t had their home loan reviewed in over two years to speak to their local mortgage broker.
The lending landscape has changed significantly in recent times, and it’s possible that their needs have as well, which means that their home loan may not be meeting their needs. Schedule an appointment to speak to your local broker to find out if you could be getting a better deal today,” concluded Ms Mitchell.
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