Mortgage

How is My Mortgage Affected by the RBA Decision?

By May 20, 2019 No Comments

Many of the major lenders have come out recently with their expectations of a rate cut or two before the year ends.  Expectations were high for a cash rate cut in May, just weeks out from the federal election. If a rate cut is provided in the coming months, do you know how soon the banks could pass on these cuts to your mortgage?

  • According to a panel of 40 industry experts, 25 per cent expected the cash rate to be cut during May’s announcement. Australian cash rate futures put the odds of a 25 basis point rate cut at May 2019 meeting at 47%.
  • According to analysis from Westpac Bank, since May 2002, the RBA has never eased policy settings when market pricing was less than 50% the day before a decision.

So, the Industry experts were a little disappointed.

In addition, 84 per cent expect the rate to be cut by August 2019. This would be a new historical low to an expected 1.25 per cent, which would make it the 30th meeting since the last rate cut in August 2016.

Economists are making these predictions because of the recent CPI figures and the current property market softening and the latest 0% inflation results.  Historically the RBA have aimed to keep inflation at 2-3%. Further to the expectation of a rate drop, nearly three-quarters of the panel at 73 per cent also expect a 2nddrop, resulting in a cash rate of 1 per cent by the end of the year.

Here is what the economists are picking up on:

  • Before the start of the RBA’s last easing cycle in May 2016, the prior statement noted that: “continued low inflation would provide scope for easier policy, should that be appropriate to lend support to demand”.
  • Up until last month, the RBA said that: “taking account of the available information, the Board judged that it was appropriate to hold the stance of policy unchanged at this meeting. The Board will continue to monitor developments and set monetary policy to support sustainable growth in the economy and achieve the inflation target over time” – Many regarded the change in language as a sign the RBA was moving towards the adoption of an explicit easing bias.
  • Prior to the release of its forecasts in February, the RBA said this regarding the outlook for Australian GDP growth: “the central scenario is for the Australian economy to grow by around 3% this year and by a little less in 2020 due to slower growth in exports of resources”. On inflation, it added: “the central scenario is for underlying inflation to be 2% this year and 2.25% in 2020.

What does this mean for my mortgage?

At Launch Money, we know there’s a whole generation of Australians who are yet to experience a rate cut – or any movement to the cash rate for that matter. This could mean confusion over what actions to take following a change.

If investors are looking for a new loan, or new investors are looking to enter the market, then a cut is good news. Existing loan holders with variable rates could see rates as low as 3.19% by the years end, assuming banks pass the cuts on in full.  Some lenders have already hinted at only passing on a 2ndcut and putting the first against their cost of funding.

However, you don’t have to wait for a rate cut or for your lender to pass on the savings to ensure you’re getting a better deal on your home loan. Right now is the perfect time to go home loan shopping – look for a rate with a ‘3’ in front of it, that provides you with the product you need to stay in the market.  For some that will be no frills loan, whilst others may require flexible account structures, credit cards and options to fix part of the loan.

Do I take fixed rate or stay with a variable rate?

Firstly, each and every borrower is different.  What suits your friend may not be suitable for you.

Fixed loans come with lower rates, make budgeting easier but are less flexible on additional repayments and redraw options. Many like to start on a fixed rate to allow the new expense to settle into their budget.  You may need other funds for re-furnishing or renovating for example.

Variable loans have higher rates, but come with more features like extra repayments and offset accounts.  These features allow you to place extra saved funds against the loan amount reducing the interest payable, then using the funds for holidays, special events and or investing.

Each has their pros’ and cons and understanding what is important to you, will assist your Launch Money broker to source the perfect loan.

With rates expected to drop to 1% cash rate, the question becomes how long before we start to see a rise in rates. With only 8% of economists suggesting a rise in rates was possible, it is reasonable to think that a rise is some way off.

At Launch Money we believe we offer an indispensable service and hold strongly to the belief that a mortgage broker is the only party to the process who is best positioned to act as an advocate for the borrower.

Our service is more than just securing the lowest mortgage rates, we give you tailored advice to help fast-track your application with the RIGHT LENDER based on your financial goals.

Whether you are buying a new home, personal investment property, Commercial property, SMSF investment property, motor vehicle or thinking about refinancing, Launch Money can help secure a better loan and deliver a hassle-free mortgage experience for you.

To speak with a broker at Launch Money call the team on 1300 925 081.

Alternatively, you can email your questions to: info@launchmoney.com.au