RBA cuts cash rate after 32 months – good or bad?

To say it has been a very eventful few weeks in the land of financing throughout May to early June would be an understatement!  

The federal election went into full swing and people voted accordingly, opting to keep the current government running the country rather than handing over to the Opposition, who were set to make soooooooo many changes within the financial sector, it potentially could have had a catastrophic impact on so many areas and subsequently, on so many people.

In terms of interest rates, regardless of what you may read in official reports, it could be argued that the RBA relented to pressure from the media to drop rates rather than maintain the status quo and keep the cash rate on hold as they have for the previous 32 months. As outlined in the RBA statement announcing the rate cut, the country has been strolling along nicely from an economic perspective and the 25 point rate cut is not necessarily going to cause Aussie ‘mums and dads’ to increase their spending exponentially to kick-start the economy.

Some lenders anticipated a rate change last week and reduced their interest rates with little to no fanfare. Then within minutes of the RBA announcement, the ‘Big Four’ banks came out with their decisions – a full 25 points cut by CBA and NAB, and reductions, though not quite as much, from the other two major lenders…So is a rate reduction a good thing for the economy at large – or not?

Well….. if your current home loan provider/bank was to pass on the full rate reduction, this means that on a normal $400,000 home loan, you could potentially save around $1000 per year or approximately $83 pm on interest (depending on how your loan is structured). Now for some people, an extra $83pm can be spent on other nice to have items. Yet recent history indicates most would take the extra funds and apply them to their home loan account in the aim of reducing their debt faster rather than spend it elsewhere. Ask yourself the question - what would you do with an extra $83pm?  

A few weeks ago, in the interest of stimulating borrowing activity, APRA came out with a recommendation that banks reduce the home loan qualifying rate down from the current minimum 7.25% to what it used to be (and should be) of around 2.5% above the actual interest rate of the loan. This announcement and related media comments seems to have confused many people. The home loan qualifying rate is not usually something that has been openly discussed outside lender land, and now that the sectors of the media  have something new to talk about, they are making all sorts of noise saying you can now borrow more than before, so potentially you can now pay more for property also, which should start to see property prices rise!!!!!   

The qualifying rate is lender home loan interest rate buffer that has been used since forever and a day - it’s not new. Those who have dealt with brokers would be aware of it, if you are one of those that insist on using your bank, you may not have ever heard the term. It is a measuring tool of how well you could potentially service your new home loan in anticipation of interest rates increasing by up to 2.5% in the near to medium term. If your current income can support this, then you qualify, if it doesn’t, then you don’t!
To date since the announcement, only one lender has made the change to their servicing calculator to reflect the APRA recommendation, though we predict others will follow in coming weeks.
Please feel free to give me a call on 0438 041 111 to organise a confidential discussion about your home loan position and how we may be able to help.

As always, enjoy life, work hard, play safe and remember that we are always here to help you
‘Take the Confusion Out of Lending’ 

All The Best

Peter Vinci - 0438 041 111