Exactly what the RBA cash rate cut means for property market activity

With a record number of households experiencing financial distress, news that the Reserve Bank of Australia (RBA) has this reduced the cash rate from 4.35% to 4.10% in a widely expected cut is welcome relief for many.

The RBA’s monetary policy statement pointed out that inflation has continued to ease to return to the 2-3% range a little sooner than expected, triggering the cash rate cut.

The big four banks moved swiftly to pass on the interest rate cut, which is the first cut since late 2020.

A number of other banks including Macquarie, Bankwest, Suncorp, ING, St George, Bank of Melbourne and BankSA also announced that they will pass on the rate cut to customers.

Savings summary

But just because the RBA has move the needle, that doesn’t mean your lender will, so keep a close eye on rate movements following the decision.

For those trying to count the cost of the savings, the breakdown isn’t perhaps as big as they might hope.

For an average owner-occupier with a $600,000 loan, the cut will mean a $92 reduction in minimum monthly repayments. Bear in mind that interest on repayments is calculated daily, meaning until the day it goes down, interest charges will remain the same in the meantime.

'How interest rate cuts affect the property market': youtube.com/mortgagechoice

According to ING, 68% of mortgage holders plan to maintain their current repayment amounts.

Among Aussies who are likely to keep paying off their mortgage with the extra money saved from reduced rates, 56% said they will be putting the funds towards paying down the principal, while 43% will be depositing it into their offset account for future access.

The research also shows that 31% of mortgage holders intend on negotiating a better rate with their current mortgage provider, while 19%  intend on refinancing their mortgage should the RBA reduce the cash rate further.

A third plan to save the extra cash, while 13% are pinning their hopes on investing the extra cash, while 12% intend to use it to pay down other personal debt.

For those who plan to save their money, 73% will be using it to build their emergency savings, while 54% will put it towards travel and holidays. Nearly one fifth (19%) of savers will put the money towards their children’s education.

Keeping up repayments

If you can afford it, keep making the same monthly repayment, despite your bank reducing your minimum monthly repayment, Trusted Finance founder and director Rob Roper tells Mortgage Choice.

On a $600,000 home loan at 6.5% on a 30-year loan term, the minimum repayment is $3,793 per month. A rate reduction of 0.25% down to 6.25% per annum would reduce the minimum monthly repayment by $98, down to $3,695.

“If you continued to make a repayment of $3,793 on the 6.25% p.a home loan, you would shave two years off the life of the loan,” he adds.

Multiple banks have jumped in and reduce their variable home loan interest rates in a bid to obtain new customers.

The big four banks are among a host of lenders who have already confirmed they will pass on yesterday's cut to borrowers. Picture: supplied

To make their offering even more attractive, many of these banks may include a cashback of around $3,000.

“A lower interest rate will reduce your minimum monthly repayments,” Mr Roper says. “If you’re struggling to meet your current mortgage repayments, this will provide you with much needed relief.

“If you can continue to make your existing mortgage repayments, this new refinanced interest rate will mean you pay your home loan off sooner and save thousands of dollars in interest charged by your bank.”

Buyers circling

The interest rate cut is likely to be a catalyst for a subdued shift in buyer sentiment Stockdale & Leggo chief executive Charlotte Pascoe says.

In fact, the rate cut could result in buyer circling the market waiting for the right moment to get on the property ladder finally making a move and making an offer.

Stockdale & Leggo chief executive Charlotte Pascoe says buyers will be reassessing their position after this week. Picture: supplied

“This cut will foster a sense of renewed confidence in affordability and future borrowing capacity,” she tells Mortgage Choice. “While we may not see an immediate surge in market activity, this reduction will encourage buyers to reassess their position, conduct more research and start considering transaction sooner rather than later.

“For many, it could be the nudge needed to re-enter the market, particularly for those who have been sitting on the sidelines waiting for greater certainty.”

Sustained momentum however will likely depend on further rate stability and broader economic conditions, Ms Pascoe adds.

While there is some consensus among economists that the RBA could make at least two more cuts this year, the board said this week that it remains cautious on prospects for further policy easing.

So the message here is that mortgaged households need to make sure that their savings are used wisely and are spread as far as possible.