Understanding the Impact of RBA Interest Rate Changes on Borrowers in Australia
The latest RBA rates announcement is a big change for Australia’s monetary environment, with the first rate cut since 2020 reducing the cash rate from 4.35% to 4.1%. And that means if you’re a homeowner with a $500,000 mortgage, you might save $77 on your monthly repayments.
But the impact of these rate reductions has wide-ranging consequences aside from plain savings. Variable rates on personal loans have increased by an astounding average of 3.39 percentage points since April 2022. Although Australia’s big four banks have made pronouncements to lower their variable rates following the RBA cut, the timing for these cuts varies, with some borrowers taking weeks before they see the benefit.
How RBA Rate Changes Affect Your Mortgage
Whenever the cash rate is altered by the RBA, your mortgage repayments can vary significantly. Based on the latest data, a $750,000 mortgage could save $229 in repayments every two rate cuts. Those holding a $1 million mortgage could save $599 every month with four rate cuts this year.
The impact of these changes varies depending on your home loan type. For variable rate home mortgages, interest rates typically track the RBA movement. Timed home mortgage payments have, however, increased to about 10% of home disposable income as of December 2023. Such payments are also bound to increase further to 10.5% by 2024.
Fixed-rate borrowers paint a different scenario. Fixed-rate home loans’ percentage hit almost 40% in the early months of 2022 but has declined to around 17% as of December 2023. Most borrowers who had availed of the fixed rates at the 2-2.5% level during the pandemic have now started moving towards higher rates at an average of 6.5%.
Impact on Various Loans
Apart from mortgages, RBA rate hikes ripple through other forms of loans. Personal loans, especially variable rate ones, respond differently to rises in cash rates. Of interest, secured car loans increased 33% to 8.15% p.a., and unsecured car loans increased 19% to 8.67% p.a. between April 2022 and November 2023.
Credit card rates display unique pattern characteristics than the rest of credit products. Notably, credit card interest rates have been less responsive to declining bank funding costs. This trend is followed by a drop in the percentage of cardholders paying interest on card balances.
Fixed-rate personal loans give the assurance amid rate changes. The loans have fixed instalment amounts regardless of RBA action. Variable-rate personal loans usually track cash rate movements, which can vary monthly payments.
Credit card lenders use different risk assessment compared to other financiers. The spread between credit card effective interest rates and bank funding cost rose from 6.7% before the GFC to 8.7% following the GFC. This wider differential shows added risk assessment in unsecured lending. This varied impact helps borrowers make informed decisions on their loan choice. Each loan type responds differently to RBA rate adjustment, making it important to consider fixed versus variable options based on individual financial needs.
Managing Your Loans When Rates Change
Acting before it happens to control your loans when the rates shift can be a real money-saver in the long term. Refinancing your existing loan works very well. According to recent statistics, a change of lenders will save as much as $161 a month on a $500,000, 30-year fixed interest mortgage at 5.75% p.a., compared with 6.25% p.a.
Paying extra repayments is another useful method of hedging against rate movement. By paying above the monthly minimum payment, you reduce the principal faster and consequently pay less interest over the term of the loan. Some loans come with redraw facilities, whereby one has access to these extra payments when needed.
For borrowers having fixed-period loans falling due, initiating advance preparations becomes very crucial. Prepay extra amounts before the fixed period ends, if feasible, without attracting penalties. This is to your advantage:
- Test higher levels of payments in advance
- Establish a cushion for funds
- Save total interest costs
In an interesting turn of events, lower bank deposit interest rates discourage household savings and can encourage consumers to consume goods and services. Maintaining savings and loan repayment constant is therefore imperative.
Conclusion
Being aware of RBA rate changes is the key to smart money management. While the recent cut is welcome news to most borrowers, its effects on various loans are drastically different. Your home loan, personal loans, and credit cards respond differently to changes, and it pays to be informed and prepared.
Act now and there are big savings to be made. Refinance, make additional repayments, or break your loan into fixed and variable rate portions. There are various strategies available to maximize your borrowing cost. While the average mortgage rate may rise by 35 basis points by 2024, planning ahead reduces its impact on your pocket.
Efficient Capital stands ready to help you maximize these rate changes. Their experts can evaluate your current loans, identify where you can save, and create a custom plan that fits your goals. Rather than navigating on your own with rate modifications, using professionals makes informed decisions that work in your long-term interest.