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Anticipated RBA Cash Rate Cut and Borrowers’ Response
The Reserve Bank of Australia (RBA) is poised to reduce the cash rate in an upcoming meeting, potentially lowering it to 3.60 per cent. This anticipated decision would signal the third interest rate cut within the year, although recent data indicates a surprising trend among borrowers.
Despite the easing of rates, Commonwealth Bank, NAB, and ANZ found that only about 10% of their borrowers opted to reduce home loan repayments following cuts in May. According to Mozo personal finance expert Rachel Wastell, maintaining consistent repayments can effectively help borrowers pay off their loans faster and minimise interest costs. However, she acknowledged this strategy may not be ideal for those requiring immediate cash flow relief. Instead, Wastell suggested that utilizing an offset account can balance interest savings with the flexibility to access funds when needed.
Borrower Behaviour
Tess Sutherland, a senior manager at Commonwealth Bank, reported that most borrowers continue to keep their repayments unchanged, retaining higher repayments instead of capitalising on the recent rate drops. This trend was consistent with observations following February’s rate cut, highlighting that only a small fraction of borrowers are freeing up cash in response to the lowering rates. NAB and ANZ have corroborated this data, noting that over 90% of their customers have maintained their repayment levels post-May’s cut.
Westpac is the exception among the Big Four banks, automatically lowering repayments for customers who are on the minimum repayment plan. Other banks, including Commonwealth Bank and ANZ, require customers to initiate the process to reduce their direct debits.
Potential Savings
Commonwealth Bank estimates that a borrower on a $500,000 mortgage could save an average of $160 monthly due to the cuts made in February and May. Forecasts suggest that if borrowers experience three cuts, those with a 30-year mortgage may ultimately save nearly $200,000 in total interest payments.
Sutherland noted that borrowers in their thirties and forties are more likely to reduce their repayments, possibly due to their compounding financial responsibilities, including managing household costs associated with raising children.
Future Expectations
All economic teams from the Big Four banks are anticipating a 0.25 per cent cut to the cash rate at the RBA’s forthcoming July meeting. The market’s predictions reflect a greater than 90% probability for this decrease. According to Mozo, such a cut would signify that owners with a $500,000 mortgage could see an approximate $76 monthly reduction in repayments.
The outlook suggests banks like CBA and ANZ expect two more cuts in July and August, while NAB is projecting three cuts spanning these two months plus November. Westpac is forecasting four more reductions, including the anticipated July cut, dependent on the RBA’s forthcoming communications.
Inflation Context
As the RBA contemplates these adjustments, it is noteworthy that headline inflation has slightly eased to 2.1% as of May, down from 2.4% in April, while underlying inflation stands at 2.4%, marking its lowest in over three years.
In conclusion, while the prospect of a RBA cash rate cut looms, the actual behaviour of borrowers indicates a preference for stability in repayments rather than taking immediate advantage of lower rates. As the market evolves, it remains to be seen how these anticipated changes will affect borrower strategies and the broader financial landscape.
