• Greg Morgan

Rates Reach Historic Lows

Australia's official cash rate has dropped to a record low of 0.10%, marking the lowest interest rate in the nation's history. Challenging times call for unprecedented measures, with the Reserve Bank of Australia (RBA) making the tough decision to slash rates in an effort to stimulate the economy out of recession. The latest interest rate cut from early November - the third cut this year - marks the latest step in a steep decline from the 0.75% rate recorded in January 2020. While the nation's largest banks have not moved their variable rates, fixed rates have been dropped in many leading mortgage products.

As the latest interest rate was announced, RBA Governor Philip Lowe said the reasoning behind the reduction was to provide credit to more Australians: "At its meeting today, the Board decided on a package of further measures to support job creation and the recovery of the Australian economy from the pandemic... With Australia facing a period of high unemployment, the Reserve Bank is committed to doing what it can to support the creation of jobs."

With rates cut on Melbourne Cup day for the first time since 2011, the RBA is serious about making a difference. While the economy has bounced back with more vigour than initially expected, the pandemic economy is still heavily influenced by high unemployment, low migration, a strong Australian dollar, and a lagging Victorian economy. However, with variable rates unchanged and existing home and business borrowers unlikely to see much of the cut, monetary stimulus measures may not have their intended impact. New borrowers are likely to benefit more widely, with first-home buyers in particular likely to take advantage of this once-in-a-generation opportunity.

Treasurer Josh Frydenberg welcomed the latest rate cut, saying it would help families and support mortgage holders during difficult times: "For someone with a $400,000 mortgage, the average across the country, what we have seen with today's announcement where it has come from down 75 basis points to just 10, that is worth $1,000 a year for someone with a mortgage that size... Some of the banks have already priced in today's announcement by the Reserve Bank, it had been highly forecast and highly expected."

Fixed rates continue to drop to all-time lows, which has led to a much higher demand for fixed mortgage loans and shorter loan periods.

In fact the Governor of the RBA, Philip Lowe has indicated previously that he does not see the need for Australia to lower rates into negative territory and has also stated "Given the outlook, the Board is not expecting to increase the cash rate for at least three years". SO, fair to say that the cash rate will remain at current levels for quite some time.

I have discussed on these pages several times of late that another rate reduction would likely not be passed on to borrowers. In the month since the RBA rate drop not a single lender has passed on the extra 0.15% to either new customers or their existing customers.

However, just about all banks have tinkered with their fixed rates. Some reducing their fixed rates to 1.80-1.99% fixed for several years. Most of the very low fixed rates are fixed for four years (i.e. a year longer than the Governors stated plan of three years). We do have one or two lenders only requiring a two your lock in to get the 1.99%.

Given the variable rates are now close to 0.50% higher than fixed rates it may be an opportune time to consider fixing a portion of your loan. Several clients have recently restructured to fix in 60-80% of their loan keeping the balance variable with the offset feature.

If you would like to arrange an in-person, Zoom or phone meeting to discuss your options please call us on 1300 668 017 or set up you meeting here.

You can also use our My Rate Check system to compare your existing mortgage to the market and find a cheaper mortgage with the same features.

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