CASH RATE CUT | FEBRUARY UPDADTE

Sahil Talwar
Feb 18
3 min read

Mortgage Marketplace — February cash rate cut: What it means for you

February cash rate cut: What it means for you

In a promising development for many Australians, the Reserve Bank of Australia (RBA) has announced a reduction in the cash rate. The rate has been lowered to 4.10%, down from its previous position of 4.35%. This marks the first decrease since November 2020. This decision comes on the heels of recent data indicating that inflation has cooled to within the RBA’s target range of 2-3%, although underlying inflation still lingers slightly above that threshold.

So, how does this change affect you personally?

The cash rate is intricately linked to the interest rates that lenders apply to loans and the rates they offer on savings products. When the cash rate is lowered, it becomes cheaper for lenders to borrow funds, providing an opportunity for them to extend that benefit to borrowers through reduced interest rates. While lenders are not required to pass on the entire cut to their customers, many consumers will be closely monitoring this situation to ensure that savings are reflected in their financial products. The most immediate impact will likely be observed in variable rates, but a forecast of declining rates may ultimately lead to more affordable fixed-rate options as well.

For prospective homebuyers, this shift in interest rates translates to lower monthly repayments, significantly enhancing one’s ability to manage a loan. A decrease in borrowing costs could pave the way for increased borrowing capacity, making it easier for individuals to enter the property market or upgrade their living situation.

Crunching the numbers

Let’s have a look at how much of a difference rate cuts can make.

Borrowing power

For this example, we’ll consider a single individual—let's call her Lucille. Lucille earns a typical full-time annual income of $90,000 and has no dependents. To understand her financial situation better, we also need to take into account the average annual expenses in Australia, which typically encompass costs like housing, utilities, food, transportation, insurance, and discretionary spending.

Now, let’s focus on her potential borrowing capacity in relation to home loans. Lucille has a mortgage that spans 30 years, which recently benefitted from a decrease in interest rates—from 6.3% per annum to 6.05% per annum. This decrease means that her lender has passed on the full 0.25 percentage points cut from the cash rate. As a result, Lucille’s borrowing power has increased from approximately $477,000 to about $489,000.

Looking ahead, if the cash rate experiences another reduction later this year—again by 0.25 percentage points, and if her lender chooses to pass on this decrease in full—Lucille’s borrowing capacity could further improve, potentially reaching up to $501,000. This increment in borrowing power opens up more opportunities for Lucille in the property market, allowing her to consider a wider range of homes or to invest in properties that might have previously been beyond her financial reach.

Repayments

Let’s consider a hypothetical couple, Craig and Patrice, who already have a home loan. They have an average Australian mortgage of $642,121 with a variable interest rate of 6.3% per annum over a 30-year loan term. Currently, their monthly repayments are $3,974.

If their lender passes on a 0.25 percentage point decrease, the interest rate would drop to 6.05%, and their monthly repayments would be reduced to $3,870. This change would save them approximately $1,248 over the course of a year.

If there is another 0.25 percentage point cut later this year, and their lender again passes on the full decrease, their monthly repayments would further decrease to $3,768. This would result in total savings of around $2,472 over the year.

Your next steps

In the coming days, we anticipate that lenders will start to decrease interest rates across various loan products. If you currently hold a loan with a variable interest rate, it would be prudent to check for any reductions that may apply. A drop in your loan's interest rate could present a valuable opportunity to assess your current loan terms in comparison to other offerings available in the market. We are here to assist you with this comparison to ensure you’re getting the best deal.

For those considering a home purchase, obtaining a pre-approval is highly recommended. This process not only clarifies how much a lender is willing to extend to you based on your financial profile, but it also helps narrow down your property search to fit within your budget. Having a pre-approval in hand can strengthen your position as a buyer, demonstrating to sellers that you are a serious and financially capable candidate. Let us guide you through the pre-approval process and help you understand your financing options.