RBA slashes rates to near zero: how to prepare your finances now

Last week, the Reserve Bank made an emergency cut to the official cash rate, reducing it to a record low 0.25% amid fears COVID-19 could tip Australia’s economy into recession. 

“The coronavirus is first and foremost a public health issue, but it is also having a very major impact on the economy and the financial system,” said Governor Philip Lowe in a statement released on Thursday afternoon.

“The result has been major disruptions to economic activity across the world. This is likely to remain the case for some time yet as efforts continue to contain the virus.”

With the coronavirus outbreak and increased social distancing measures already hitting small businesses and households hard on the financial front, many Aussies may be wondering what the RBA’s decision to bring interest rates even closer to zero means for their mortgage and savings.  

As times get tougher, how can you navigate these near zero rates and protect your finances? 

To get you started, here’s a few money savvy ways to help you keep afloat and take advantage of rate movements following the RBA emergency meeting: 

FOR HOUSEHOLDS 

Look into fixing your home loan

According to Mozo Banking Expert, Peter Marshall, the main competition among lenders over the next couple of years will likely be in fixed rate home loans. 

“As part of the package that the RBA announced, they’ve made available a fixed term facility to the banks which allows them [the banks] to borrow up to three years at a rate of 0.25%. So the banks know that they’ve got a pool of money available to them which is incredibly cheap,” he said. 

Already the big four banks have announced massive slashes across their fixed rate home loans - CommBank, for instance, will cut its 1, 2 and 3 year rates by 70 basis points to 2.29% p.a., while ANZ’s 2 year rates will drop to an even lower 2.19% p.a.. These reductions would make the big banks’ rates some of the most competitive in the Mozo database, at the time of writing.

But Marshall warned against locking in a deal too soon. 

“If the Commonwealth Bank is able to take an aggressive position like they have, the other lenders are all going to respond to that. I expect that over the next couple of weeks, we’ll begin to see fixed rates even lower than the ones brought out by the major banks,” he said. 

“You don’t want to jump in before the competition has had a chance to develop. Plus it’s highly unlikely fixed rates will go back up in a near zero interest rate environment, so there’s really no rush. I think right now isn’t a particularly good time for taking action. Rather, it’s a time for waiting to see how things develop.”

Hot tip: Check to see if your lender offers a split loan arrangement, which would allow you to divide your mortgage into fixed and variable. That way, you’ll have access to the best of both worlds - the repayment flexibility that comes with variable rates and the repayment certainty that comes with fixed rates. 

Lock some savings away 

While a near zero interest rate environment could be good news for your home loan, the future looks far more dismal for deposit accounts. As banks increasingly feel the squeeze on their bottom line, competitive savings rates are the first to go - and we’ve already seen that happen earlier this month after the first RBA cut. 

That said, term deposits remain a viable option. The Mozo database reveals you can still snag rates as high as 2.15% p.a. with Judo Bank (for its 5-year term). 

Judo Bank maintains its position as the term deposit leader across the following terms: 

With term deposits, the rate you secure today is locked in for the duration of the term, protecting your savings against further rate cuts. So if you’ve got cash that you won’t need to touch for a while, now could be the time to consider stashing it inside a term deposit.

Hot tip: Beware of early withdrawals from term deposits - not only will you seriously damage the amount of interest you earn, but you’ll also have to pay a penalty fee. So to avoid this worst case scenario, be sure not to lock all your savings away, and pick a term that you can comfortably stick with. 

Buff up your emergency savings stash 

As low as at-call savings rates may be in the current climate, Marshall said there’s no reason not to shop around for a high interest savings account and park your emergency funds inside of one. 

“It’s always a good idea to have a bit of a cash buffer, but right now, because we don’t know what will happen over the coming months, having as much for an emergency buffer as you can manage is even more essential,” he said. 

“Even if there’s not much interest earned on top of that savings stash, it’s very sensible to just have some cash available in the bank.” 

Right now, five savings accounts in the Mozo database offer maximum rates of 2.00% - the highest ongoing rate available to new customers, as long as they meet certain monthly conditions (e.g. making a minimum deposit or a minimum number of transactions). 

To see what sort of return you might get with this rate, let’s do the maths using Mozo’s savings calculator. 

Say, you deposit $1,000 each month on top of the $20,000 you already have in the bank. If rates haven’t fallen after a year and you’ve also made no withdrawals, you could be looking at interest earnings of $514 and a total balance of $32,514 in your savings account! 

Hot tip: The rule of thumb for your rainy day fund is that it should cover your expenses, including rent, power bills and groceries, for 3 months. 

FOR SMALL BUSINESSES 

Consider refinancing your business loan

You may have noticed that lenders haven’t been passing the latest RBA cut onto mortgage holders as they usually would. Instead the spotlight this time round is on small businesses, with the big banks introducing variable rate cuts to business loans ranging from 0.25% (with ANZ) up to 1.00% (with CommBank and NAB). 

“That’s definitely been the pattern so far and I expect that most of the banks will follow that pattern. The government is urging banks to support businesses, and that’s certainly where all the benefits are going so far,” Marshall. 

So for businesses with a loan under their belt, now could be the time to shop around and check to see if you’re in a position to switch to a better rate “because there will be a lot of lenders competing to get small business loans out the door”. 

Ask your bank for help

But for the many small businesses struggling for survival and unable to refinance, talking to your bank about hardship arrangements that may be available to you could be your next best option. So far, all of the big four banks have said they will offer small businesses the option to defer loan repayments for up to 6 months. 

So if you’re a business paying off loans of $1 million, this would free up $40,000 to $50,000 of working capital, according to ANZ. 

“Possibly the bank would even look at cutting their interest rate if it means helping their customers to avoid defaulting on the loan,” Marshall added. 

The federal and state governments have also announced stimulus packages to aid small businesses and households affected financially by the coronavirus. To find out more, head over to our stimulus package wrap up. 

And for further details on what lenders are doing to help customers, check out our guide to Australian banks' coronavirus relief packages.