RBA cuts the cash rate to 2%

Category News
11 May 2015, Comments 0

The RBA cut the cash rate to 2%, so what impact does this have on your debt and budgeting?

Debt

If you have a mortgage on your own home or an investment property, this may be good news for you as your bank may cut your interest rate on your loan (if on a variable interest rate). Home loan interest rates in the past were adjusted down or up in line with changes to the cash rate by the Reserve Bank of Australia (RBA). However in recent times, banks have broken away from this to a degree and may only pass on part of a rate cut, on the other hand they usually pass on the increase in full!

Your borrowing capacity may improve with lower interest rates. Keep in mind what goes down will eventually go up, and this needs to be taken into account when assessing your borrowing capacity. It is wise to add on a couple of % points when determining payments, if you don’t you may find yourself in financial trouble when interest rates do rise.

As people are able to borrow more during periods of low interest rates, this may stimulate the property market.

Well you may say, the interest rate on my credit card should go down. Sadly this is generally not the case. Maybe because these rates are a bit more hidden, in fact most people will not know that the interest rate they are paying. Current personal loans generally will not benefit much either.

Budget

Lower interest rates will mean the interest you receive on any cash or term deposits will be lower. Once your savings reach a reasonable level, it may be time to invest in growth assets such as property or shares. Interest on cash and term deposits is taxed at your marginal tax rate and once you take into account the effect of inflation, you may not really be receiving much benefit.

If you have a mortgage, a better option (if available) may be to have an offset account for your loan. Alternatively, you could put the money into your loan.

Please note the information above is for information only. It does not taken into account your goals and objectives and you should seek the advice of a professional such as a Financial Planner or Accountant if you require further information.

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