Today the 2nd of August 2016 the Reserve Bank of Australia announced a reduction in official interest rates by 0.25% to a record low of 1.50%. But what does it mean for the ordinary person out there with a home loan?
For about 80% of the people in the market who have variable rate loans this could mean you end up paying less in interest. I say “could” because your bank has discretion in the how much of the 0.25% they choose to pass on to their customers as savings. Assuming they do, for most people a reduction of 0.25% works out to be a saving of $1,000 annually. This will obviously depend on the size of your loan.
Over the next few weeks you will see banks review their acquisition rates (the ones you see advertised). This makes it a perfect time to review your home loan and consider refinancing. With the a lot of the market paying somewhere around 4.50% and up your savings could be closer to $2,000 or $3,000 annually.
For the rest of the people in the market who have a fixed rate home loan unfortunately nothing will change. By locking in your fixed rate you don’t get the benefit of reductions in interest rates until your loan term finishes.
Now we need to wait for our banks to announce how much they are going to pass onto their customers. CBA has lead the announcement by passing on a cut of 0.13% and typically whoever announces first normally has a large influence over the others decisions. We will know for sure soon. For our sake let’s hope for a 0.25% reduction but don’t be surprised if we don’t get it because for the Big 4 keeping 0.05% in the pocket works out to be about $150m in income over the year. Not a bad return.
The bottom line. If you're not sure what you should be paying or your bank doesn't pass on the full cut get us to check your rates. We will let you know if you have an opportunity to save or not. Simple.