Interest rate cuts: What that means for you
If you’ve watched the news lately, you will have seen that the Reserve Bank of Australia (RBA) has cut interest rates for the third time this year, bringing the official cash rate down by 0.25% to 3.60%.
After years of steady rate hikes, the trend has finally shifted. We’ve already seen several cuts this year, giving many Australian households some welcome breathing room.
So, when you hear about an interest rate change all over the news, you might be wondering, why should I care? and how does this actually affect me?
What is the cash rate, really?
The Reserve Bank of Australia (RBA) is like the country’s money manager. One of their main jobs is to keep the economy running smoothly, make sure people have jobs, and stop the cost of living from rising too quickly.
Once a month, they meet to decide what the “cash rate” should be. The cash rate is the base interest rate for the whole country and has a lot of knock-on impacts.
When the RBA changes the cash rate, it’s because they want to influence how much people and businesses spend.
- If they cut the cash rate – borrowing money becomes cheaper, which can encourage people to spend and invest more.
- If they raise the cash rate – borrowing becomes more expensive, which can slow down spending and help keep prices from rising too fast.
So, when the RBA cuts rates, it puts pressure on banks to lower the interest rates they charge on home and investment loans. But it’s not automatic, each bank decides whether to pass on the full cut, part of it, or none.
Homeowners
Your first thought is probably: Will my repayments drop? The answer is… it depends on the type of loan you have:
- Variable rate loans – Your bank will decide if they’ll pass on the cut and by how much. They usually announce this within a few days, but it might take weeks before your repayments actually change.
- Fixed rate loans – Your repayments stay the same until your fixed period ends, no matter what the RBA does.
You’ll usually get an email, letter, or app notification from your bank if your rate is changing. If you’re not sure, check their website or give them a call.
Non–homeowners
If you’ve got money in a savings account, rate cuts are not always good news. Banks often lower savings interest rates when the cash rate drops, which means your savings might not grow as quickly.
It’s worth:
- Checking what interest rate, you have now
- Comparing it with other banks to see if you can find a better deal
- Considering the features, benefits and conditions that come with that rate (it’s not always just the rate you need to consider)
If you don’t have a savings account, let’s say you’re investing with Raiz instead, a rate cut can sometimes work in your favour. Lower rates can leave people with more spare cash (for example, if their home loan repayments drop), which can lead to more spending and investing. That extra activity can give parts of the share market a boost. It might also mean you personally have a little more room in your budget to put towards savings or investments. Either way, rate changes can have plenty of flow-on effects worth keeping an eye on.
A rate change = Check in
Your finances should never be “set and forget”, it’s important to check in regularly and make sure your money is working as hard as it can.
A rate change is the perfect time to look at:
- What your bank is doing with the latest cut
- Whether your current loan or savings account rate is still competitive
- If you can get a better deal (and the trade off to that deal like the loss of valuable benefits)
Even small changes now can have a big impact over time. Taking a few minutes to review your loans, savings and investments could save you hundreds (or even thousands) over the next year, and that’s money you can put towards your goals instead.
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Important Information
This blog has been issued by Instreet Investment Limited (ACN 128 813 016 AFSL 434776) as Responsible Entity of the Raiz Invest Australia Fund (ARSN 607 533 022) and has been prepared without taking into account your objectives, financial situation or needs. Before acting on such information, you should conduct your own review or consult a financial advisor before making a decision to invest. Please read the relevant Product Disclosure Statement and any associated reference documents before making an investment decision. In accordance with the Design and Distributions Obligations, we maintain Target Market Determinations for our Funds. All documents can be found on the Raiz website www.raizinvest.com.au, or calling the Customer Support team on 1300 754 748. Please note that past performance is not a reliable indicator or guarantee of future performance. Historical returns, forecasts, and market commentary are provided for general informational purposes only. All investment carries risk and may result in loss of capital.
