What does the RBA’s rate cut mean to you?

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The Reserve Bank of Australia (RBA) cut the official cash interest rate by 0.25% this week, but what does that really mean for the property market? And how much money will you save on mortgage repayments?

Real estate agency Ray White has welcomed the move, saying that it is in tune with a changing tide in Australian property transactions and offering some encouraging words about the state of the property market.

“Ongoing doom and gloom in the property market appears to have been dramatically overstated, we’ve seen an unexpected and exciting change in our recently reported May figures,” said Ray White Group chairman Brian White.

“The Ray White Group hit the best monthly sales results for two years. In fact, that stellar May result followed a soft April month, so it’s a serious indication of a changing tide,” he added.  “Both Queensland and Western Australia improved dramatically, recording 23% and 28% on the previous year respectively.”

However, as has become the property industry’s rallying cry as each RBA rate cut is announced, White has called upon the banks to pass on the rate cut in full.

“We call on the banks to pass on the RBA decision today and support aspiring home-owners to engage in the market,” he said.

Residex CEO John Edwards, believes that the banks will continue their course of only passing on partial rate cuts, adding that the RBA should have held firm and hold out on cutting rates until the extent of Europe’s economic woes are more clearly understood.

“The size of today's rate cut is such that a lot of it will probably get lost in the bankers needs to maintain margins and their stability. Funding margins in the current global finance market will be being impacted on as markets look to reduce risk exposure, particularly in Europe,” he said.

”A single, significant reduction of 0.5 to 0.75% later in the year would have a guaranteed outcome at the consumers 'gate' once the banks have also balanced their position.”

How much will I save?

Assuming the 0.25% rate cut is passed on in full, a borrower with a $300,000, 25-year, Principal & Interest mortgage at 7% would see their monthly repayments drop from $2,120.34 to $2,072.73. This would represent a monthly saving of $47.61, and saving on the overall amount of interest paid over the entire loan term of $14,283.

Assuming a more realistic scenario where the lender only passes on a partial rate cut of 0.2%, the same borrower would still save $38.12 on their monthly repayments, and $11,436 on the interest paid over the entire loan term.

Calculate your own potential savings with the Your Mortgage basic repayment calculator.

But before you start planning a spending spree with your anticipated extra cash flow, you’d be well-advised to consider keeping your repayments at their current level to put the extra money towards reducing that loan and giving yourself a healthy buffer.

“Those who can should take advantage of the interest rate stability and increase their home loan repayments to reduce their mortgages,” said Loan Market corporate spokesman Paul Smith.

But simply adjusting your repayments isn’t the only way to cut costs, said Mortgage Choice spokesperson Belinda Williamson.

“Investigate whether or not you are making the most of any loan features such as an offset account and/or redraw facility, and make sure you are not paying extra for features you don't need or use and you are being charged a fair fee for account transactions," she said, offering five home loan “hotspots to investigate:

  1. An offset account: Deposited savings in an offset account attached to a home loan helps to reduce the interest accumulated on the loan. Take a loan of $300,000 at 7% over 30 years; if an average of $5,000 was held in a full offset account from day one, the loan term is reduced by approximately 15 months and the interest owed is reduced by around $33,525. Note some lenders offer partial offset only. Find out if you have an offset account attached to your loan and if you do, make sure you are using it to your advantage.
  2.  Redraw facility: Allows extra repayments made to be withdrawn when needed. In some cases this is at a cost. Rather than earning interest in a savings account, where the interest earned is taxable, the funds in the redraw facility lower the principal loan amount, reducing the interest owed on that principal. If you have a redraw facility, put as much as you can into your loan such as your income and savings, and withdraw it only if it is an absolute necessity.
  3. Extra repayment option: Some loans allow borrowers to make extra repayments by putting extra funds into the loan and/or increasing the frequency of repayments. E.g. a borrower with monthly repayments of $2,000 will pay $24,000 into their loan by year end. By halving the monthly repayment and paying $1,000 fortnightly, they will pay $26,000 as there are 26 fortnights in a year. Check if your loan has the flexibility that allows you to make extra repayments, and if so, see what difference extra repayments can make.
  4. Focus on fees: Depending on your loan and lender, there could be monthly or annual account keeping fees, and/or fees for making extra repayments, redrawing funds or breaking a fixed rate or loan term early. In some cases the cost of a loan may outweigh the benefits. Investigate the associated fees and other loan aspects and compare your options to see if a better suited and well-priced loan exists elsewhere.
  5. Loan term: The length of a loan's term impacts the repayment amount and interest paid. E.g. if you borrow $300,000 at 7% over 30 years, principal and interest repayments are $1996 per month. Total loan costs are $719,493 and the interest component is $419,493. That same loan paid out over 25 years sees monthly repayments $124 higher but equates to a saving of $82,562 in interest. If you can afford the higher repayments associated with a shorter loan term, investigate the cost of changing your loan term.

Are you considering your home loan options? Visit Your Mortgage to find out where you stand, or discuss the issue in the mortgage & finance section of our property investment forum.

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