What would an RBA rate cut mean for your mortgage?

Remy Taylor

Monday 04 February 2019

It’s been on the cards for a while, but a cut to the RBA’s official cash rate cut could finally be just around the corner. This could mean relief for borrowers, but according to Mozo Data Manager Peter Marshall, it’s not that simple.

What would an RBA rate cut mean for your mortgage?

The RBA’s official cash rate has sat at an all-time low 1.50% for a record long 26 months. But with the first cash rate announcement of the year coming tomorrow, Marshall said it’s only a matter of time until we see the RBA lowering the official cash rate.

“Housing was once the main reason why the RBA couldn’t cut rates further. But since house prices have been falling so hard and fast, a lower cash rate is no longer an issue,” he said.

“Even if it does give house prices a little bump up the Reserve Bank have the scope on both the inflation front and housing to cut rates and not have a negative impact on the economy. “

Another reason the RBA may be inclined to cut rates is to slow the flood of out of cycle home loan rate rises made by lenders. Although banks are generally expected to have rates in line with RBA cash rates, recent funding cost pressures have seen a trend of rising rates hitting old and new borrowers.

What could an RBA rate cut mean for your mortgage?

Marshall has predicted that there could be two RBA rate rises this year and that the first rate would stop mortgages getting more expensive by ending the need for more bank hikes. But it wouldn’t be until a second cut that banks would begin to pass those savings onto borrowers through home loan rate cuts.

“Last year, a lot of lenders, about half in Mozo’s database increased rates by between 6 and 20 basis points. And when the RBA cuts, it’s usually by 25 basis points. So that actually leaves only a 5 basis point cut difference from where a lot of borrowers were 8 months ago,” he said.

“I think that one cut is just going to put people back roughly where they were. So there will need to be two cuts if the RBA actually want to give borrowers some relief and boost spending.”

The effect on your mortgage if your lender passes on the savings from a rate cut

Although there’s no guarantee lenders will pass on the savings from an RBA rate cut, if they do it could mean some extra room in Aussie budgets. To give you an idea of what an interest rate cut could really mean, we’ve calculated the difference in monthly repayments on a $400,000 loan, with different sized rate cuts.

CutNew RateNew RepaymentMonthly savingsSavings in one year
0.05%4.31%$1,982$12$144
0.10%4.26%$1,970$24$288
0.15%4.21%$1,958$36$432
0.20%4.16%$1,947$47$564
0.25%4.11%$1,935$59$708

*Based on a $400,000 home loan over 30 years at 4.36% average variable interest rate and LVR of 80%.

Want to do your own calculations on what an RBA rate cut could mean for you? Head over to our home loans repayment calculators

If your lender isn’t passing on rate cuts, or you think you could get a better deal, head over to our home loans table to compare low rate home loans today.

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