Here’s why many Australian women are feeling the pinch following the Reserve Banks’ (RBA) latest changes to the cash rate.
We see it on the news: ‘RBA does something to interest rates’, followed by footage of men in suits, a shot of the outside of the RBA building, and a snooze-inducing press conference from the Treasurer. We know it means something for our home loans or our credit cards, but we’re not sure exactly what. Let’s break it down.
A 101 on the cash rate
The RBA, our country’s central bank and the one who issues our currency, sets an official cash rate, which is the interest rate for overnight loans provided to banks. The cash rate serves as a sort of benchmark for everything to do with money and the banks, from mortgages to savings accounts to the currency exchange rate. So, it’s an important component of our national monetary policy. If you’re all over this, perhaps skip ahead, but if you want us to break it down for you so you know what it’s all about: keep reading.
Raise it, drop it, keep it steady
On the first Tuesday of every month (except January), the RBA board comes together to decide whether to raise the rate, drop it or keep it steady. Their decision is based on a number of factors from the strength of the economy, the housing market, unemployment figures, and the performance of the AUD.
After three years of holding steady, the RBA lowered the cash rates by 0.25% for the last two months in a row, bringing the current rate to 1%. The hope is that this cut will help reduce unemployment and achieve more progress towards the inflation target. While these changes can only do so much, it’s useful to get to the bottom of how this might affect you.
What does this mean for me?
A change in the RBA’s cash rate can affect us in a number of different ways, depending on what financial products we have (i.e. home loans, credit cards, savings accounts). When the cash rate goes down, it typically means that interest rates go down, which is usually good news if you have a mortgage but not so good if you have a savings account. But here’s the catch – lenders are not obligated to pass on the RBA’s rate cut to their consumers. Some do, some don’t.
So, the first question to ask yourself is: do I have a home loan? If yes, read on. If no, skip ahead.
The deal on home loans
Most lenders pass on the RBA’s rate cut to their home loan holders, although some are cheeky and don’t, or they might pass it on in part. So the next question to ask yourself if you have a home loan is: do I have a variable or fixed rate home loan?
If you have a variable rate home loan and your lender passes on the rate cut, you’ll be happy to see a drop in the amount of interest you have to repay on your loan. For example, a rate drop like the one in July (0.25%) could save you $684 a year on a home loan of $400,000 (calculated based on a 30-year mortgage and 4% rate). In even better news, you don’t need to do anything – it will happen automatically.
However, if you have a fixed rate home loan, you’ll have to be patient and wait until the end of the fixed rate period (commonly 1-5 years) to take advantage of lower rates. (Find out more here about what to do when the fixed period is up.) And if you want to see if your lender has been naughty or nice in passing on the rate cut, here’s a useful table on home loan lenders.
Looking to enter the property market?
Often when there’s a decrease in the cash rate, like the one in June and July this year, it means that people are more likely to try and enter the property market. This is because lower interest rates means home loans become more affordable. It also means that you might see a whole lot more paddles at your next auction, and property prices might start to rise again.
Got a credit card?
Similar to home loans, banks can agree (or not) to pass on the rate cut to their cardholders by lowering their credit card interest rates. You guessed it – a lower interest rate means you pay less interest on the purchases you make, which means it’s easier to spend but also easier to pay off your debt. That doesn’t mean schedule in your next spending spree (although that’s what they want you to do!), but it could mean that you get yourself out of debt quicker so you can start reaching your money goals. (Have you done our six-step Money & Mindset program yet? It’s free for Verve members.)
Again, if your bank doesn’t lower your credit card interest rates, it may be time to reconsider your relationship.
Impact on your savings account
If you’ve got your dollars earning interest in a savings account, a rate cut may spell b.a.d. news for you (and it’s not the Badasses Amassing Dollars kind). Don’t panic. Basically, we want our savings to be earning interest at the highest rate possible, so a drop in the rates means that the speed with which your savings grows will slow down. Think of it as winter is coming for your bank balance. Again, make sure your savings are at the highest rate you can find, and if your funds are locked away in a term deposit, you won’t feel the pinch.
Now the question you’ve all been waiting for: how do these changes affect my super? The impact of a rate cut on your super depends on a number of factors including how close to retirement age you are and what the makeup of your portfolio is (Verve’s is a balanced growth account).
Having a diverse portfolio means a rate cut will likely have a modest impact. For Verve members, that will be the case as you have a diverse mix of investments.
For those who have reached preservation age, or are in retirement, lowering the rates can sting as you will be relying on interest rates from your savings.
Overall the decision to lower the cash rate is a signal: the economy is not in top condition and the impact on us, as consumers, is mixed While some of us are feeling the pinch and the outlook for the Australian economy is shaky — have faith. Australia has successfully avoided recession throughout three global downturns and we’re approaching four consecutive recession free decades. In the meantime, stay on track and maintain strong financial foundations — a full emergency fund, a plan to minimise or avoid bad debt and stay on track with spending.