What the RBA rate cut means for your home loan

Unless you've been living under a rock, you'll surely know by now that the Reserve Bank of Australia (RBA) has cut official interest rates to an historic low of 1.25%.

It's a significant moment in interest rate history as it marks the first time the RBA has cut interest rates since August 2016.

The interest rate cut is big news in Australia because the cash rate is one factor when lenders set their variable mortgage rates. An official interest rate decrease usually means lower interest rates for borrowers.

Here's what it means for your mortgage loan whether you're a first home buyer, a next home buyer, or are already paying off a mortgage.

If you're a first home buyer

First home buyers are set to be big beneficiaries of the recent rate cut. Here's how the interest rate cut will help you:

Make paying off a home loan comparatively more affordable than renting

When interest rates decrease, the gap between renting versus paying off a home loan can sometimes be narrower.

If you're paying off your mortgage

If you're already paying off your home loan, the interest rate cut could:

Help you pay off your home loan sooner

If your current lender has cut its rate, you can choose to keep paying the same amount you were previously, which will help you get ahead on your repayments.

You could also choose to put that spare money into an offset account, which will allow you to pay your home loan off faster and with less interest.

Help you save up for your next car or home

You can choose to pay your minimum home loan repayments and put the extra money towards saving for a home renovation, downpayment for your next home or for buying a new car

If you're looking to buy a new property

If you're looking for your next home, an interest rate cut could make it easier to take that next step. That's because an interest rate cut can lead to:

Lower mortgage repayments

Lower interest rates mean lower mortgage repayments. 

Let's use an example of someone who has borrowed $450,000 to buy a home with a 30-year mortgage and a 3.53% variable interest rate.

Using our loan repayment calculator we can calculate that their monthly repayments would be $2,028.24 a month.

But if their lender were to bring their rates down to 3.28%, then those repayments would fall to $1,965.85 a month. That's a difference of $62.39 a month, or $748 a year, which is a significant saving if you're struggling to make your mortgage repayments.

Keep in mind that if you're on a fixed rate home loan, nothing will change as your interest rate is fixed - meaning it stays the same regardless of any cash rate changes made by the RBA. 

Use a mortgage calculator to know your repayments

Whether you're looking to renovate your home or you're buying your first home or your next one, a home loan calculator will let you work out what your repayments will be based on different interest rates.

Will interest rates drop any more?

Most economists predicted the June interest rate cut would come, and many economists and commentators have forecast there will be at least one more cut before the year is over. With each interest rate cut saving the average homeowner about $700 per year*, this is welcome news for those with mortgages.

 

*Duffy, E. (2019). Retrieved from https://www.savings.com.au/home-loans/refinancing/didnt-get-a-rate-cut-how-to-refinance-your-home-loan/

 
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