You’ve probably seen plenty of headlines about the interest rate cuts in Australia recently, but with all that corporate banking speak, it’s hard to find the details that apply to you (why do news outlets always sound like the Australian Financial Review when explaining this stuff??). But don’t worry, we’ve got you.
Here’s the TLDR: The Reserve Bank of Australia (RBA) has cut the cash rate for a second time since 2020 – a 0.25% cut that brings the rate down to 3.85% – after holding it at a 13-year high since November 2023.
And the bit about you: The banks are passing the rate cut on to variable rate customers, so that means if you had, for example, a $500,000 mortgage, you’d save about $77 a month.
So, it sounds like a win, but is a low interest rate good for you? Let’s unpack the rate cut details, plus the pros and cons of low interest rates.
The interest rate cut, explained
The Reserve Bank of Australia (RBA) has been battling inflation with back-to-back interest rate hikes since the emergency pandemic low of 0.10% in 2022. There’s been 12 increases and of course, the economy did her thing (she might be a bit sensitive to the RBA’s monetary policies) and made many Aussie bank accounts look significantly sadder…
3 in 4 Australians have been feeling the cost-of-living squeeze and cutting back on life’s little pleasures, with the daily ‘let’s grab a coffee!’ turning into ‘maybe I’ll just have the free Moccona at work’. And for many homeowners and buyers, it’s felt like punishment for daring to own (or wanting to own) property.
What are the benefits of low interest rates?
Lower mortgage repayments
Like we said, you’ll be spending a bit less on your mortgage now. Sure, it’s not a huge amount, but hey, it’s enough to reclaim a little extra joy in your life! Whether that’s your monthly San Churros date night or some cute houseplants to join the family (we can hide the receipts from your partner, dw). Otherwise, you can use the savings to chip away at the mortgage or put it in an offset account to help reduce interest.
Higher borrowing power
Lower interest rates mean more of your money can go towards paying off any debts, which in turn, gets the banks scrambling for your business. In other words, the banks blow up your phone as they become a whole lot more willing to throw a bigger loan your way. But before you auto-decline, there may be good reason to push past the phone anxiety and see what they’ve got to say for themselves (hint: a bigger loan could look like an extra bedroom or a backyard glow-up for your fur baby!)
And when we put 1 and 2 together, it also gets people thinking …
“Hey, maybe it’s a good time to buy?” (i.e a boost in buyer confidence)
Then, before you know it, everyone wants in. So, if homeownership has been on your vision board, now could be a good time to speak to a professional and lock in that pre-approval!
But “what’s the catch?”, you ask? Well, there might be a couple.
The disadvantages of low interest rates
Your bank doesn’t have to reduce rates
Just because the RBA lowers interest rates, it doesn’t mean your bank has to follow suit. They’re under no legal obligation to (which is probably why some lenders take their sweet time passing on the savings). But, with plenty of public attention and pressure on the banks to act fast, most will be expected to follow through—in fact, many have already. So, if your bank hasn’t passed on the rate cut yet, make an enquiry. Or, if they’ve decided against passing on the rate cut, consider calling your broker for a better deal.
Impacting the Aussie dollar
There was a minor increase in the Australian dollar after the rate cut announcement, which has had a mixed reaction from global markets. To put it simply: a stronger Aussie dollar is great if you’re booking an overseas trip but not so great for other countries. Rate cuts also have the tendency to turn around and weaken our currency over time, and this translates to imports getting more expensive and international online shopping hauls becoming a lot less fun…boo!
House prices might go up
We already touched on the positive effect of rate cuts on buyer confidence. But this also means that as demand goes up, house prices may creep up. And not only are there lingering concerns about housing affordability, but inflation risks are also still hanging around. So, no one (not even the RBA) can tell us for sure what the economy’s going to look like—that’s why they’re so cautious about further policy easing (AKA future cuts aren’t guaranteed).
So, what’s the bottom line?
Well, in a world where many of us can’t seem to catch a break, the RBA has lent a hand towards making this whole adulting-homeownership-situation a bit more manageable. Maybe it’s the difference between a surprise electricity bill ruining your entire week and having the extra cash for a barista-made coffee on Mondays. However you want to see it, we’re going to take the win. But we’ll keep you posted on how everything pans out!
