The Reserve Bank of Australia (RBA) is Australia’s central bank. It’s responsible for the country’s economic development and financial stability through the use of monetary policies. This includes the RBA rate, better known as the cash rate, or the benchmark interest rate in Australia.
In this article, we’ll provide a detailed breakdown of what RBA rate cuts are, when they might occur, as well as their impact on the housing market.
What are RBA Rate Cuts in 2023?
A rate cut refers to a decision made by the RBA to reduce the cash rate. This is done mainly to stimulate economic activity by lowering interest rates, making it cheaper for people to borrow money.
The cash rate has undergone a series of hikes since the beginning of 2022, increasing from an all-time low of 0.10 per cent to 3.60 per cent in April this year. As such, many economists are speculating that rate cuts may happen to balance out this uphill trend. As of the writing of this article, there have been multiple discussions between financial guides and institutions on whether rate cuts will happen, but there is no definitive answer yet.
Timing and Frequency of RBA Rate Cuts
Historically, the RBA has kept a varied stance on rate cuts with no consistent frequency. Instead, they depend on economic conditions and monetary policy objectives to inform their decisions. For example, the COVID-19 pandemic in 2020 led to a series of rate cuts that was aimed to give the economy a boost.
As such, the best way to anticipate a rate cut would be to rely on informed experts that monitor the country’s economic indicators and performance while doing on own supplementary research.
How do RBA Rate Cuts Impact Home Loans
Like any other interest rate, home loans are affected by any changes to the cash rate set by the RBA. When the RBA institutes a rate cut, the cost at which financial institutions borrow from the central bank is lowered. This, in turn, means those financial institutions might then pass on the lowered cost to borrowers like homebuyers.
This means that rate cuts are usually good news — at least for homebuyers. With lower interest rates, monthly mortgage payments become more manageable, reducing stress on finances for homebuyers. There are also benefits for refinancing a home loan during a rate cut, as a lower borrowing rate can lead to significant savings over the loan’s term.
Tips for Refinancing During Rate Cuts
While there is a possibility for you to benefit from cost/interest savings during a rate cut, this may not always be the case. We’ve outlined some tips below to guide you in determining if you should refinance your home loan during a rate cut.
- Evaluate costs and savings: A lower loan rate will net you savings, but these savings can be outweighed by potential fees such as break costs. Depending on the terms of your loan, you may need to pay an additional fee (break cost/exit fee) when terminating it. Before refinancing, you should first check if the savings of the new loan will be worth paying the break cost.
- Review long-term plans: Refinancing may help you save in the short term but result in more instability in the long term. You should reflect on your long-term financial goals to check if refinancing will help you reach them.
How RBA Rate Cuts Impact the Property Market
On the flip side, the increase in affordability for home loans that rate cuts bring about may result in a rise in property prices. Here’s why — lower mortgage rates incentivise buyers to make purchases, resulting in an increase in demand. In turn, this naturally leads to an increase in property prices. The rise in prices is generally felt more in urban areas as compared to suburban areas due to popularity of location.
How to Prepare for RBA Rate Cuts
It’s hard to say exactly when, but the continued rise of the RBA rate could mean that a rate cut is around the corner. If you are looking to buy property or refinance your existing home loan, here’s how you can prepare for and make the most of a rate cut:
- Assess your financial situation: Take a look at your available funds and consider if or how you will want to use them when the opportunity arises. Having an awareness of your financial circumstances will enable to you make better decisions down the road.
- Evaluate home loans: It’s always good to know what options you have before making a decision. Do your research on current fixed and variable home loans or refinancing options.
- Seek professional advice: Getting advice from an experienced financer can help you identify things that you may have overlooked or do not understand.
Rate cuts are a double-edged sword that cuts both ways, affecting both borrowers and lenders. As such, there is no ‘best’ set of steps to take during a rate cut, and the decisions you make should be based on your financial goals and situation.
Thinking of taking on a home loan or refinancing an existing one? Be sure to consult a qualified team of professionals like the ones at Wisebuy Home Loans. As an award-winning mortgage advisor with over 60 lenders, we are committed to helping you make a well-informed decision. Give us a call today!