Cup day is famous for rate cuts and rises and the Reserve Bank didn’t disappoint us making the historic decision to cut the cash rate by 0.15 per cent today, slashing official rates to 0.10 per cent.
The RBA has also announced a range of other measures including buying $100 billion in government bonds and reducing the cost of funding.
RateCity.com.au analysis shows the average mortgage holder with a $400,000 loan could see their minimum monthly mortgage repayments fall by $33 per month if their lender passes it on in full.
Impact of today’s 0.15 per cent cut if passed on in full
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Source: RateCity.com.au. Assumes an owner occupier paying principal and interest over 30 years. This scenario is based on the current average rate of 3.19 per cent.
Sally Tindall, research director at RateCity.com.au, said:
“As our economy starts to re-open, along with our borders, this move from the RBA is intended to help people get jobs, assist businesses and provide people in financial distress with some rate relief.”
Today’s announcement puts immense pressure on the banks to pass it on to their existing variable home loan customers,” she said.
Around half a million mortgages were deferred at some point during COVID, and those families are unlikely to be in a position to refinance. These are the people who need a rate cut.
A rate cut could save the average home loan customer $33 per month, which may seem like small change to some people, but for families struggling to make ends meet it could be the lifeline they need.
At this stage the big banks appear to be playing a game of chicken with no announcements as to whether they will pass it on to their customers.
Impact to savings rates
RateCity analysis shows the average ongoing savings rate is now 0.52 per cent.
This could fall to below 0.40 per cent on the back of today’s rate cut.
“The outlook for savers has just turned from gloomy to bleak, with another RBA cut today and no prospect of a rate rise for at least the next three years,” she said.
“Already a handful of banks are offering no interest on some savings accounts. While the big banks will desperately want to avoid cutting their base rates down to 0 per cent, it can’t be ruled out,” she said.
Tim Lawless, Corelogic, comments:
Today’s cut takes the cash rate target to an unprecedented low.
If passed on by the banks, which is highly likely, we will see mortgage rates fall further from their already record lows.
Historically cuts to interest rates have fuelled housing market activity and generally aligned with upwards pressure on dwelling prices.
With the trend in housing values already rising around most areas of the country, there is a good chance lower rates could see momentum building across the nation’s most valuable asset class.
The RBA’s primary focus from lower interest rates is to ensure businesses are confident enough and willing to invest, as well as encouraging households to spend.
With this in mind, the RBA is likely to look through the ‘noise’ of higher housing prices in an effort to stimulate business investment, jobs growth and household consumption.
The stimulus of such extremely low interest rates, together with the initiatives announced in the federal budget and state level incentives like stamp duty concessions and building grants, are likely to be enough to outweigh the headwinds facing the market. Headwinds include the wind down of fiscal support such as JobKeeper, and the expiry of home loan repayment deferrals,
which are moving through their peak period of expiry this month.
If housing market conditions generate too much risk through rising prices, particularly in the lending space, policy makers might consider other mechanism that will allow interest rates to stimulate the economy, but keep a lid on house price appreciation.
Macroprudential initiatives have proven to be a rapid and effective means of quelling housing market exuberance via credit policies.
The previous Macroprudential policies were largely aimed at investor activity and interest only lending, both of which remain at modest levels at the moment.
Considering household debt levels remain close to record highs, any intervention from a Macroprudential perspective would likely be focussed around hard limits on debt to income ratios or loan to valuation ratios
Comments from the RBA:
With Australia facing a period of high unemployment, the Reserve Bank is committed to doing what it can to support the creation of jobs.
Encouragingly, the recent economic data have been a bit better than expected and the near-term outlook is better than it was three months ago.
Even so, the recovery is still expected to be bumpy and drawn out and the outlook remains dependent on successful containment of the virus.
The elements of today’s package are as follows:
- a reduction in the cash rate target to 0.1 per cent
- a reduction in the target for the yield on the 3-year Australian Government bond to around 0.1 per cent
- a reduction in the interest rate on new drawings under the Term Funding Facility to 0.1 per cent
- a reduction in the interest rate on Exchange Settlement balances to zero
- the purchase of $100 billion of government bonds of maturities of around 5 to 10 years over the next six months.
To view the full announcement please visit: https://www.rba.gov.au/media-releases/2020/mr-20-28.html
Comments from Mortgage Choice:
Speaking about the RBA decision, Mortgage Choice Chief Executive Officer Susan Mitchell said…
“The Reserve Bank has delivered the third cash rate cut this year and commenced a new era of monetary policy in Australia by announcing its quantitative easing program.”
Today’s decision will come as welcome news to families across the country in the lead up to the Christmas period who are looking to save on their home loan interest repayments.
However, it remains to be seen if lenders pass on any of today’s rate cut.”
Regardless of how much variable rates drop in response to the latest cash rate cut, the reality is that borrowing money has never been cheaper – the home loan market is extremely competitive right now and we’re seeing some fixed rate loans that are cheaper than variable rates.
Mortgage Choice home loan approval data shows that the trend towards fixed rates remains strong, with 32% of borrowers choosing to lock in part or all of their rate in October.
The decision to lower the cash rate makes sense given the extreme uncertainty in the global economy.
Governor Guy Debelle recently said that Australia was technically out of a recession, despite the conditions in Victoria, however recent data revealing persistently low inflation and high unemployment, shows we have a long way to go.
In an early sign that the housing market may be rebounding from the impacts of the COVID-19 pandemic, the CoreLogic Hedonic Home Value Index revealed positive month-on-month growth in October.
National dwelling values rose 0.4% over the month, with every capital city apart from Melbourne recording a rise in values.
In more encouraging news, the Westpac-Melbourne Institute Index of Consumer Sentiment surged in October to the highest level since July 2018.
The rise in sentiment was attributed to the response to the Federal Budget, the success in containing the COVID-19 outbreak and the expectation that the RBA would cut the cash rate, as it has done today.
Regardless of whether lenders pass on the cash rate cut to variable rate home loans, my advice is to ensure you’re taking advantage of the competitive market.
If you’re on a variable interest rate, check to see what rate you’re paying and ask your mortgage broker or lender if they can get you a better deal.
If your interest rate has dropped and you’re in a position to pay beyond the minimum repayment, I encourage you to keep your repayments at the same level to pay your loan down faster,” concluded Ms Mitchell.
Lower interest rates least likely to encourage Australians to spend – Steve Mickenbecker – Canstar
Despite another cash rate cut, new research reveals Australians won’t likely spend if home loan interest rates are cut further.
New Canstar survey data reveals lower interest rates are the least likely factor to encourage Australians to spend, with only 6% of the 1,054 respondents identifying a home loan interest rate cut as being the catalyst to encourage them to spend money in the next 12 months.
The survey was asked of mortgage holders and non-mortgage holders.
The research points to higher wages (24% of respondents), improved savings interest rates (19%) and job security (16%) being the top three drivers for increased consumer spending in the year ahead.
Canstar Group Executive, Financial Services, Steve Mickenbecker says a cash rate cut is unlikely to stimulate the economy.
“With existing home and business borrowers unlikely to see much of the cut and the former unlikely to spend it even if they do, the stimulus of a rate cut to the economy will be very modest” said Mickenbecker.
“Borrowing rates are so low already that a cut is largely irrelevant. Even if passed on fully, a cut of 0.15% to the average $400,000 over 30 years will lower the monthly repayment by $33, not enough to make much of a difference to borrowers’ spending and house purchase intentions.
“Economic stimulus now is all about confidence and jobs.
“The cut is looking like a realignment of the cash rate with what has already been happening in interest rate markets, where bank bill swap rates are already below 0.10% and the three year government bond rate 0.135%. The cut is largely symbolic.
“Unfortunately the people who expect spending stimulus from increased savings rates will not see any joy, as the trend of rate cuts for savers is likely to continue. No bank is keen to put a zero or negative base rate into the market, but savers can expect further cuts to bonus rates and introductory rates.”
In 2020, the Reserve Bank has cut the cash rate by a total of 0.50%.
Following is a snapshot, according to Canstar data of what the banks and lenders have cut rates by during this time.
94 lenders have cut variable home loan rates this year, by an average of -0.36%
72 lenders have cut fixed rates this year, by an average of -0.67%
The lowest variable rate for owner occupiers paying principal and interest with a loan-to-value (LVR) ratio of 80% was 2.74% in January, though this has come down by 0.55% to 2.19%
The average variable rate has dropped from 3.73% to 3.37%
The lowest variable rate in the market is Homestar’s Star Gold variable rate at 1.79% (comparison of 1.84%) for 60% LVR on loans up to $850,000 and only available for applications received by 31.12.20 and settlement by 31.03.21.
61 banks cut savings rates in 2020, while only 1 increased savings interest rates
Bonus savings accounts have been cut by an average of -0.63%, while regular savings rates came down by an average of -0.60%
The highest savings rate for adult savers is currently 2%, down from 2.65% at the start of the year
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