Interest rate cuts

In summary:

  • Good for home owners – more money in your pocket.
  • Good for home buyers – interest rates are low and easier to enter the market
  • Good for retailers, especially with the recent reduction in fuel prices.
  • Good for investors, as it should push more cash into shares looking for better returns.

On Tuesday 3 February 2015, the RBA cut the cash rate by 25 basis points. This interesting move will serve to save a household in a net borrowing position of $200,000 around $500 a year in interest (assuming it is fully passed on by the banks). The cut is coupled with a recent drop in fuel prices (around 27% since November 2014) – an input cost regional Victorian businesses and families are particularly sensitive to.

Those regional businesses sensitive to the Australian dollar have seen it plunge to around the $0.76 to $0.77US mark today. This will continue to help exporters, but increase the price of goods imported.

We have also seen the Victorian Government indicate Local Government property rate increase capping pegged to CPI for the 2016/17 financial year onwards. A general rate increase of 6% was experienced by City of Greater Bendigo residents for 2014/15. Presently CPI sits at 1.7% (to December 2014).

All the above factors serve to improve the cash position of regional households. They may be factors in strengthening local house prices too.

Brad Ead
Partner, AFS & Associates

Lower interest rates can affect how much (or how little) a mortgage will cost – a huge factor in how much money everyone has to spend, and the stability of the economy. When rates fluctuate it controls how much money there is in the household budget, in turn affecting how much money is spent in the community.

Home Owners – An interest rate cut can lead to more money in your pocket, as it decreases the cost of your mortgage. We say can, as banks are not required to pass the full interest cut down to customers, although they often do. Sometimes banks will pass on the full cut (or sometimes none at all) however, with a variable interest rate loan you should be able to feel the affects of most interest rate cuts.

Home Buyers – If you are in the market for a home loan it might seem like the ideal time to buy when interest rates are low. That is true, but only in the short term. In Australia, rates can only be fixed for three to five years. If you take out a mortgage when rates are very low you could see a rise in your mortgage amount as rates increase. Be careful, Ensure you buy a home you can afford, even when rates increase.

An interest rate cut is often a good thing for the economy because it helps put more money in the system. Just be aware that as it falls, it can also rise, so protect yourself by taking out loans you can afford if rates increase again.

Michael Camm
Managing Director, Venture Financial Advisers