Written by Dona Edwards (AR 1262208) authorised representative of Industry Fund Services Limited (AFSL 232514)
If you’re an Incolink member juggling a mortgage while working in the construction industry, you’re in for some good news. Yesterday, the Reserve Bank of Australia (RBA) has announced another rate cut. Let's break down what this could mean for your home loan, your repayments, and even the broader property market.
What’s happening with interest rates?
The official cash rate in Australia has been reduced from 4.10% to 3.85%, following signs that inflation is easing.
The RBA has a target inflation band of 2 to 3 per cent and they use the interest rates they set to try and stay within this inflation band. When inflation starts increasing, we usually see rate increases to try and curb or bring inflation back down and then when inflation is low or lowering, we start to see decreases to the rates.
With recent economic data suggesting that inflation has been easing faster than expected, another rate cut is not a surprise.
This is especially true right now, because interest rates are particularly high relative to recent years and so is the cost of living.
What should you do now?
For building and construction workers with a mortgage, this could mean some relief on your home loan repayments. For new borrowers looking to get a mortgage, it could help you buy a new home.
Have an existing mortgage? A change to repayment amount.
If you’ve got a fixed mortgage, this cut won’t have any impact on your loan repayment amount, because you’ve locked into a set interest rate for the agreed term of the loan.
If you’re on a variable loan, rate cuts generally flow on to becoming lower interest rates for borrowers. A lower interest rate means a lower mortgage repayment.
Lower cash rates are often used to stimulate economic activity. If the economy improves, banks might be more willing to lend more due to increased confidence in borrowers' ability to repay loans.
Banks generally will base their interest rates on their products in line with the RBA, but they don’t have to and some haven’t in the past. Times are tough at the moment, so there would be a lot of pressure on those banks to help ease it slightly for customers.
Are you a “new borrower” or refinancing? A slight change to borrowing power.
- Lower interest rates: A cut in the cash rate usually leads to lower interest rates on loans and mortgages. This means borrowing becomes cheaper, which can increase your borrowing capacity.
- Increased borrowing capacity: With lower interest rates, your monthly repayments on a loan would be lower. This can make it easier for you to meet the bank's lending criteria, potentially allowing you to borrow more.
My repayments have reduced, should I pay the new, lower repayment?
If you can afford to keep paying at the higher amount, that will provide you with higher interest savings, meaning you’ll pay your mortgage off quicker than if you paid the reduced amount. Times are tough and every dollar counts, so make sure you do what’s right for you in your situation.
What will this rate cut mean for my mortgage?
A recent Canstar article reported the basic average interest rate for home loans to be 6.41%. So, using that rate, let’s see what the rate cut could look like for a 25-year home loan term.
Current loan amount | Average basic interest rate @ 6.41% | If rate cut is passed on in full @ 6.16% | Savings (repayment) amount |
$300,000 | $2,009 | $1,962 | $47 p.m. |
If you kept the same repayment amount, you would save an additional $18,019 over the term of the loan, which would be reduced by around 1 year, 3 months. | |||
$600,000 | $4,018 | $3,925 | $93 p.m. |
If you kept the same repayment amount, you would save an additional $35,680 over the term of the loan, which would be reduced by around 1 year, 3 months. | |||
$900,000 | $6,026 | $5,887 | $139 |
If you kept the same repayment amount, you would save an additional $53,340 over the term of the loan, which would be reduced by around 1 year, 3 months. | |||
What if it was a 30-year loan term?
Current loan amount | Average basic interest rate @ 6.41% | If rate cut is passed on in full @ 6.16% | Savings (repayment) amount |
$300,000 | $1,878 | $1,830 | $48 |
If you kept the same repayment amount, you would save an additional $29,457 over the term of the loan, which would be reduced by around 2 years. | |||
$600,000 | $3,758 | $3,659 | $98 |
If you kept the same repayment amount, you would save an additional $60,575 over the term of the loan, which would be reduced by around 2 years, 1 month. | |||
$900,000 | $5,635 | $5,489 | $146 |
If you kept the same repayment amount, you would save an additional $89,480 over the term of the loan, which would be reduced by around 2 years, 1 month. | |||
What could future rate cuts look like for 25-year principal and interest loan term?
Current loan amount | What another 0.25% rate cut could look like @ 5.91% | And another @ 5.66% | And let’s hope for one more @ 5.41% |
$300,000 | $1,916 | $1,871 | $1,826 |
$600,000 | $3,833 | $3,742 | $3,652 |
$900,000 | $5,749 | $5,613 | $5,479 |
What could future rate cuts look like for 30-year principal and interest loan term?
Current loan amount | What another 0.25% rate cut could look like @ 5.91% | And another @ 5.66% | And let’s hope for one more @ 5.41% |
$300,000 | $1,781 | $1,734 | $1,686 |
$600,000 | $3,563 | $3,467 | $3,373 |
$900,000 | $5,344 | $5,201 | $5,059 |
These are examples only and the impact a rate cut will have on your mortgage repayments will depend on your current loan amount, interest rate applied, existing repayments and the remaining term of your loan.
All rates are rounded to the nearest dollar.
What’s Next?
With the first rate cut in over four years now in place and another cut announced, all eyes are on the RBA’s next move. The central bank will meet again in July, and if inflation continues to ease, we could see further reductions to help ease cost-of-living pressures.
For now, make sure you’re making the most of this rate cut—whether that means enjoying lower repayments or using the extra savings to pay down your loan faster.
Dona Edwards
Financial Adviser, IFS – Supporting Incolink Members
Issued by Industry Fund Services Limited (AFSL 232514) (IFS) | phone 1300 680 821.
Written by Dona Edwards (AR 1262208) | 1 Pelham Street, Carlton VIC 3053 | phone 0459 758 637. Dona is an authorised representative of IFS.
General advice only. Does not consider your personal circumstances. Consider if the advice is appropriate before acting on it and read the relevant product disclosure statement.
IFS and Incolink have entered into an agreement for IFS to provide financial advisory services to Incolink and its members.
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