30/06/2019
Interest Rates ~ In case you missed it!
WHAT ABOUT YOUR INTEREST RATES NOW THE RESERVE BANK HAS DROPED THEIRS?
With a soft economic outlook, few economists were surprised to see the Reserve Bank of Australia (RBA) DROP its record-breaking cash rate ("RBA cash rate") by 0.25% this week.
The market had given just a 4% chance of a change in May, but the experts where anticipating a full 0.25% cut to the RBA cash rate in June.
For homeowners with a mortgage, or those looking to borrow, it can be hard to know what to make of these financially challenging times. Will they benefit or hamper your financial aspirations and goals?
I’ve put together the key facts you need to know about RBA predictions and the cash rate to ensure your mortgage continues to work hard for you.
Forecasts aren’t fact...
When making a prediction about what the RBA will do, economists are taking an educated guess about what could happen in the future, based in the information they have available at the time.
When considering if a change to the cash rate is required, the RBA considers various economic indicators including, the inflation rate, unemployment, wage growth, household debt, the Australian dollar and business and consumer spending.
At the start of 2019, most economists were in agreeance that a cut was likely, with November earmarked as a potential month for the cut to take place. The decision was made to bring that forward.
What drives rate changes for borrowers...
Lenders obtain funding by issuing bonds in the domestic and global wholesale bond markets. The primary factors that influence a financial institution's cost of funding via this method are the costs of bond issuance and the Bank Bill Swap Rate (BBSW). The BBSW is the benchmark rate used for wholesale funding for financial institutions and fluctuates constantly.
If you tuned into an average news report it would be easy to think that the cash rate set by the RBA and the rate you pay for your mortgage are directly linked. But in reality it’s variations in the BBSW, which is very much influenced by international factors that directly impact the cost of funding a home loan and accordingly the interest rates to you, not the RBA cash rate.
There certainly is a connection between the RBA cash rate and the BBSW, and historically the two have for most part correlated very closely. However there have been some points in time when this correlation has been interrupted, such as during the global financial crisis in the late 2000s and in the unusual economic circumstances that we have found ourselves in since 2017, (think Trump and Brexit), The BBSW has started to increase despite there being no change in the RBA cash rate. This has led all Australian lenders to increase their interest rates on homeloans.
If and when the RBA does make a decision to adjust the cash rate, it’s important to understand that the amount of the change will not necessarily translate into the same adjustment on home loan rates. Given the recent volatility of the BBSW it is difficult to speculate the outcome for borrowers of a predicted RBA cash rate cut. However, even with only a loose correlation between the RBA cash rate and the BBSW it is likely that lenders would be in a position to adjust interest rates to some extent.
Get on the front foot with your mortgage...
As a borrower, it always pays to give your home loan a regular health check to make sure that the features, rate and repayment schedule still suits your financial situation and goals.
It can also help to make sure that you are well positioned to adapt to a change in interest rates, should one occur.
If rates appear likely to increase, choosing a fixed interest rate can help to shield you from additional repayment costs to your mortgage by locking in to an agreed rate for a set period of time.
If rates decrease however, it’s a good idea to use the opportunity to increase the amount you are repaying to really get ahead on your financial goals.
After this weeks announcement, NOW is the time for a health check of your loan.
