28 Feb RBA Cuts Interest Rates: What It Means for Borrowers

RBA Cuts Interest Rates: What It Means for Borrowers

The Reserve Bank of Australia (RBA) has reduced the official cash rate by 25 basis points to 4.10% following its latest monetary policy meeting. This move was widely anticipated as inflation eased from 3.6% in the September 2024 quarter to 3.2% in December, bringing it closer to the RBA’s target range of 2-3%.

With this rate cut, lenders are expected to follow suit by lowering their variable-rate products in the coming days. However, the extent and timing of these reductions will vary between financial institutions, meaning borrowers should keep a close eye on the market to secure the best possible deal.

How the Rate Cut Impacts Borrowers

1. Mortgage Holders with Variable Rates

For homeowners with a variable-rate mortgage, this rate cut is good news. A lower interest rate reduces monthly repayments, freeing up cash flow for households.

For example, consider a borrower with a $600,000 mortgage on a 25-year term at a variable rate of 5.10%. If their lender passes on the full 0.25% reduction, their interest rate would drop to 4.85%, potentially saving them around $90 per month in repayments. Over a year, that’s over $1,000 in savings that could be used for other expenses, investments, or additional repayments to pay off the mortgage faster.

2. Prospective Home Buyers

For those looking to enter the property market, a lower interest rate could mean improved borrowing capacity. Lenders assess loan applications based on serviceability calculations that include interest rates. As rates drop, the amount borrowers can qualify for may increase, making home ownership more accessible.

For example, if a buyer was previously approved for a $700,000 home loan at a 5.10% interest rate, a reduction in rates could increase their borrowing power, enabling them to afford a slightly higher-priced property or secure a loan with more comfortable repayments.

3. Fixed-Rate Borrowers

Unfortunately, the rate cut does not immediately impact those on fixed-rate mortgages. Borrowers who locked in higher interest rates in the past year may need to wait until their fixed term expires before they can take advantage of lower rates. However, if they are nearing the end of their fixed term, now is an ideal time to start reviewing refinancing options to ensure they secure a competitive rate when their fixed period ends.

4. Property Investors

Lower interest rates can also benefit property investors by reducing the cost of their investment loans, improving cash flow, and potentially making new investments more attractive. Additionally, as borrowing becomes more affordable, increased demand from buyers could support property prices, which may benefit existing investors in the market.

5. Personal and Business Borrowers

For individuals with personal loans or businesses with loans tied to variable rates, this rate cut could mean lower repayments, improving financial flexibility. Small businesses, in particular, may find it easier to manage cash flow and invest in growth opportunities with lower borrowing costs.

What’s Next for Interest Rates?

Looking ahead, the RBA’s future cash rate decisions will depend on inflation trends, employment figures, and the broader economic outlook. If inflation continues to ease, further rate cuts in 2025 are a possibility, which would provide additional relief for borrowers. However, if inflation remains stubborn or economic conditions shift, the RBA may hold rates steady.

What Should You Do?

With rates changing, now is a great time to review your loan arrangements. Whether you have an existing mortgage, are looking to buy, or are considering refinancing, comparing lender responses to the rate cut can help you secure the most competitive deal. Some lenders may pass on the full reduction, while others may not, so shopping around or speaking with a mortgage broker can be beneficial.

If you’d like to explore your options, we can help assess your current loan structure and ensure you’re in the best position to take advantage of these changes. Get in touch today to discuss how this rate cut could impact you.

Important information and disclaimer

The information provided in this document is general information only and does not constitute personal advice. It has been prepared without taking into account any of your individual objectives, financial solutions or needs. Before acting on this information you should consider its appropriateness, having regard to your own objectives, financial situation and needs. You should read the relevant Product Disclosure Statements and seek personal advice from a qualified financial adviser. From time to time we may send you informative updates and details of the range of services we can provide.

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