An interest rate cut - remember them?
How does a rate cut work?
The RBA meets every month and amongst other things, has a bit of a chat about the ol' cash rate. This cash rate thingy is effectively just a market interest rate for loans between financial institutions. It acts as a benchmark for most interest rates in Australia and has an impact on other interest rates - like deposits and loans.
This means that when the RBA makes a change, it effects the interest rates charged by lenders on your home or investment loans; as well as the interest rates they offer on your savings accounts. So if the cash rate goes down, generally loan and deposit rates go down; if the cash rate goes up, loan & deposit rates go up.
So even if you don’t have a home loan, you can still feel the effects, as there will probably be a change to the interest you receive on your savings, which depending on the direction, can be good or bad!
How will it effect your loan?
Well the RBA said they're going to cut the cash rate by 0.25%, from 1.50% to 1.25%. This means that if your bank announced they were going to pass the full interest rate cut onto you, then your home or investment loan should reduce by 0.25% over the next few weeks.
So on a $400,000 home loan, a change from 4.25% to 4.00% will reduce your repayments by $58 / mth* or $696 / year - enough to cover your car rego for the year or maybe a couple of nights holiday somewhere.
However let’s say your bank chose not to pass on the full rate cut and only reduced your rate by 0.18%. That means your interest rate is only 4.07% instead of 4.00% and your loan repayments only reduce by $42 / mth or $504 / year. That’s an extra $192 / year you have to pay!
That is a nice dinner for 2 that you have to give up; or one night less you get to stay on that holiday. Kinda not fair is it? Plus it’s not your fault the bank can’t manage their business and need to keep some of those funds for themselves!
Can you save more?
Well, actually you probably can, so let’s take it one step further: just say you haven’t looked at your home loan for a few years - it’s ticking along nicely, you’re making repayments every month and life is just happening. But with these interest rate cuts, your bank sends you a letter telling you that your rate is dropping from 4.60% to 4.35%. What the? But aren’t you seeing ads for home loans for something like 3.54% or lower? Well yes you are and you’re probably missin’ out baby!
Two things have happened here and it’s gonna make you a little bit cranky:
- Interest Rate Creep: while you back has been turned, enjoying life, your interest rates have been creeping up over the past few years - 0.05% here, 0.11% there and all of a sudden your rate is way higher than you thought it was.
- You’ve been too loyal: your bank is nice, they’ll look after you. I mean you’ve been loyal to them, so surely they’ll be loyal to you, right? At least that’s what you thought. Ahem! Take a look at what your bank is offering brand new customers and compare that to what you’re paying. Probably a massive difference! Remember when you were a brand new customer and the great rate that you received? We’ll now you’re a ‘loyal’ customer and it appears you’re treated differently!
In this case, let’s just do a quick comparison - if you were to get 3.54% on that $400,000 loan instead of the 4.35% you were being offered, your monthly repayments would drop from $1,991 to $1,805! That is a massive $186 / month or $2,232 per year! OMG! Imagine how nice the weekend away would be with those kinda savings - you might be able to stay an extra few days.
This happens quite a lot - you’re super busy and just totally forget to check your home loan statement from time to time; then all of a sudden you do and realise your interest rate was heaps higher than you thought, meaning you're paying more to the bank that you probably need to.
So when you hear the RBA announcement in the news each month, it’s a good reminder to check your rate, because if you haven’t checked your rates for a while….well, maybe it’s time to do so now. You see, the money is probably better off in your pocket than the bank’s! And you just might just save yourself a bucket load of dough - even enough to take yourself on a great…….HoLo-day! (yep, we just said that - we couldn't help ourselves!)