The Reserve Bank cuts rates for the first time since 2020 and it is welcome relief for many mortgage holders across the country. A 0.25% rate cut has been declared by the RBA and will take the official cash rate down to 4.10% p.a.
Key Points
- RBA announces 0.25% rate cut
- This will lower repayments on average mortgage repayments in Australia
- Borrowing power could increase as a result of the changes
- Banks are due to review and announce their rate movements over the coming days
Following a long wait and growing market expectations, in positive news for many mortgage holders, the Reserve Bank of Australia (RBA) has decided to cut the official cash rate on 18/02/2025. The cash rate has been cut by 0.25% falling to 4.10%. The announcement by the Reserve Bank Governer indicates this was a hard decision for the board as inflation is still hogh but they have conceded it is falling which has given them confidence that now is the right time to cut.
What is the impact for mortgage holders?
Interest rates charged by banks and lenders are tied to the official Cash Rate of the RBA. This is true for mortgages (home loans) and savings and deposit accounts. It is widely tipped that most banks will be passing on the full 0.25% rate decrease to their customers and likely will do the same with deposit rates.
A win for mortgage holders who will now pay less but a loss for any savers out there.
If you are planning to buy a home then this cut is going to potential benefit you in terms of lower future mortgage repayments, meaning the house you want to buy will become more affordable and possibly increase your borrowing power with lenders. Now even though you could borrower more after this announcement, it doesn’t mean it is wise if the repayments are still outside your budget.
Example of benefit due to the rate cut
If there is a reduction to the standard variable home loan rate by 0.25% , customers will save an extra $90 per month, or $1080 per year, based on a $500,000 home loan with principal and interest repayments.
As a current mortgage holder, this could be welcome relief for you to then have that extra money in your pocket for other expenses. For some, it may also benefit you to keep your repayments at the same level as before the cut and by doing this, you may be able to pay your loan off sooner with less interest.
If you want to know the impacts of the cut on your current loan reach out and I can help determine your savings.
Borrowing power to increase
With everything else being equal, a rate cut could increase a person’s borrowing capacity. Using a scenario whereby someone is applying for a 30 year mortgage and earning $90,000p.a. as a single, the difference in borrowing power before the rate cut using an interest rate of 6.30% p.a. to a new rate of 6.05% p.a. would allow the borrowers capacity to increase from $477,000 to $489,000. An increase of $12,000.
This can help the person afford a higher priced property, possibly giving them 1 or 2 more bids up their sleeve at auction.
Your next steps
We are expected all lenders (especially the major and leading bank lenders in Australia) to pass on the full 0.25% rate cut over the next few days. Announcements will flow and if you find your lenders doesn’t cut or they fail to provide the full cut from the RBA then now could be the right time to review your rates and see if there is a better deal out there.
If you are interested in buying, comparing your current rates or have any general lending queries, get in touch to speak with a qualified My Options Finance broker today.