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With the uncertainty of the federal election behind it, the RBA has decided to reduce the official cash rate to 1.25% as it tries to stimulate household spending and the economy. This is the first rate move since August 2016 and we’d like to share some thoughts on why the Reserve Bank of Australia has made this decision.

In making this decision the RBA has taken into account inflation being below its target range of 2-3%, continued pressure on house prices, evidence of rising levels of mortgage stress, a borrowing squeeze in response to the Banking Royal Commission, slow wages growth and continued concerns around the level of under employment.

Here is a table showing how Australia’s average mortgage sizes may be affected:

Loan amount examples Likely decrease in repayments
$150,000 $31.25 per month
$250,000 $52.08 per month
$350,000 $72.91 per month
$450,000 $93.75 per month
$550,000 $114.58 per month
$650,000 $135.41 per month

These numbers assume the RBA cut is fully passed on by lenders, which is rarely the case. Last time rates were cut back in 2016 by 25 points, the Big 4 passed on cuts between 10-14 points.

This time around Treasurer Josh Frydenberg has warned banks that “the public would rightfully expect the benefit of any sustained reduction in funding to be passed on in full.”

“The royal commission highlighted how the culture within financial institutions needed to improve … and how the conduct had fallen below public expectations,” he told The Australian on Tuesday.

The first bank to respond to the cut, ANZ has pledged to pass on just 70% of the 25 point cut; drawing criticism from Treasurer Frydenberg. Westpac also decided not to pass along the full cut, with shadow treasurer Jim Chalmers labelling the move “disgraceful.

What this means for you:

Lenders continue to review rates independently of the RBA with some already making reductions in anticipation of the RBA decision. It is therefore important to review your lending options regularly to ensure they remain the most suitable for your situation.

Canstar research has revealed existing home loan borrowers with the Big four could be paying a rate 0.79 per cent p.a. higher on average than the rates being offered to new customers.

If you are loyal to one bank, you could be paying more than you need to be. Existing customers on one package offered by the Big 4 are paying an average of 4.66%, with new customers being offered rates of 3.87% for the same product.

On Monday news even broke of one lender offering a fixed rate of 2.99% for 12 months.

If you have a $600K mortgage, you could save $130 per month. What can you do with an additional $130 per month? Buy 4 cases of beer, pay down your loan faster, get another property, save up for the holiday at end of year.

Is your lender going to sponsor your holiday in Bali this year?

There may be different rates available from our wide panel of lenders and our team is always available to ensure you have the right financial solution for your current and future circumstances. If you’d like to have a chat about what the rate cut means for you and your finances, please don’t hesitate to get in touch. Call 0433 133 630 or leave your details below.

DWS Finance Team

Important information: The information provided on this website is of a general nature and for information purposes only. It does not take into account your objectives, financial situation or needs. It is not financial product advice and must not be relied upon as such. Before making any financial decision you should determine whether the information is appropriate in terms of your particular circumstances and seek advice from an independent licensed financial services professional.

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