February cash rate cut: What it means for you

In positive news for many, the Reserve Bank of Australia (RBA) has today cut the cash rate. The cash rate is now at 4.10%, down from 4.35%, in the first cut since November 2020. The decision to reduce the cash rate follows data that shows inflation in Australia has cooled to be within the RBA’s target range of 2-3% (though underlying inflation remains slightly higher).

But how does this impact you?

The cash rate is closely tied to the interest rate lenders charge in their loans, or offer on savings products. If the cash rate is lower, lenders can borrow money for less, which they could pass on in lower interest rates. While they are not necessarily obligated to pass on the full cut to their customers, there will be many eyes watching to make sure savings are passed on. It will most directly be noticed in variable rates, but long-term predicted reductions should also see reduced fixed rates.

For those who are considering buying, lower interest rates mean lower repayments and increased ability to service the loan. This can mean increased borrowing capacity.

Crunching the numbers

Let’s have a look at how much of a difference rate cuts can make.

Borrowing power

For this example, we’ll consider a single person - we’ll call her Lucille. Say Lucille earns the average full-time annual income of $90k, has no dependents and with the average Australian annual expenses. A 30-year owner-occupier loan that dropped from 6.3% p.a. to 6.05% p.a. (because the lender passed on the full .25 percentage points cut) would potentially see her borrowing power increase from $477k to $489k. If the cash rate drops again later this year by another .25 percentage points, and the lender passes it on in full, Lucille’s borrowing power could increase to $501k.

You can get an estimate of your borrowing power using this calculator. Though remember, this is a guide. Reach out if you would like a more tailored calculation.

Repayments

Now we’ll look at a hypothetical couple that already has a home loan - Craig and Patrice. Craig and Patrice have the average Australian mortgage of $642,121 and make monthly repayments with a variable interest rate of 6.3% p.a. with a 30-year loan term. Their current repayments are $3,974. Should their lender pass on the .25 percentage point decrease to their interest, it would drop to 6.05% and their repayments would be $3,870. This would save them around $1,248 over a year. If there is another .25 percentage point cut later this year and their lender again passes on the full amount, Craig and Patrice’s monthly repayments would decrease to $3,768. This would save them around $2,472 over a year.

You can find out how much your repayments could be using this calculator.

Your next steps

Over the next few days, lenders should begin decreasing interest rates. If you have a loan with a variable rate, check in to see if it has dropped. It could be a good opportunity to compare your loan including interest rate with others in the market. We can do that for you.

If you are interested in purchasing, it is often a good idea to get pre-approval. This shows you how much a lender may be willing to lend to you and helps you to refine your search to your price range.

Reach out to get started.