Today the Reserve Bank of Australia (RBA) cut the cash rate by .25 percentage points, moving it from 4.10% to 3.85%. This is the second cut this year, moving the cash rate .50 percentage points lower than the start of the year.
This is offering relief to many homeowners throughout the country who have been facing the highest interest rates in a decade. In fact, following the last cash rate cut in February, we saw a 63% increase in refinancing activity. With the latest cut and more anticipated, we expect to see this trend continue throughout the year.
How much could a homeowner save?
Let’s break down what these cuts could mean for a homeowner. We’ll consider a total of .5 percentage points cut since the start of the year. Say you had a $750,000 home loan on a 30-year term with a fortnightly repayment and your interest rate at the start of the year was 6% p.a. The two cuts would move it to 5.50% p.a.. That could save over $3,500 in interest in the first year alone.
Let’s say you refinance and lock in a full 1% reduction. Changing your interest rate from 6.5% p.a. to 5.5% p.a. on a $750,000 mortgage could save over $170,000 over the life of the loan.
So why consider refinancing?
The catch is not all lenders will pass on each cut in full. Most passed on the February decrease, however history has shown this isn’t always the case. They also vary in when they pass on the cut and how much they will pass on. In some cases, lenders offer new customers better rates than existing in a way to lure in new business. This can lead to paying a “loyalty tax” if you don’t regularly compare your loan.
By doing your research and understanding what is available, you can speak with your lender to negotiate a better deal. If they won’t come to the table, it could be worth switching to one that will.
5 tips to save as interest rates come down
Whether or not we get further cash rate cuts, there are steps you can take to save.
Compare and negotiate your rate
Get to know what rates are available and how yours compares. Use this information to talk to your lender. It never hurts to ask for a lower rate, and if they won’t offer a competitive deal, consider switching to another.
Keep your repayments the same
If your lender reduces your minimum repayments, consider asking to keep them at the higher amount. You could save a lot in interest and pay off your loan faster.
Make extra repayments
As we approach the new financial year, keep in mind you could contribute money you receive from a tax return or bonus toward your home loan. It could make a big difference over time.
Take advantage of your offset account or redraw
Putting extra savings in an offset account or into a home loan with a redraw facility can reduce the interest on your loan, but still be available if you need it.
Switch to fortnightly repayments
Simply changing from monthly to fortnightly repayments can help you save big. That’s because you will make 26 fortnightly repayments rather than 12 monthly, meaning you are paying off more of the loan faster.
If you have a home loan, now could be a good time to check it is still competitive. Your Loan Market broker can research a panel of over 60 lenders to see how yours compares. They can also look at your situation and goals to determine if the structure of your loan is right for you.
