Rate cut frenzy: RBA decision will show how good your home loan really is

We are almost certainly expecting the RBA to cut the cash rate on Tuesday in response to US president Donald Trump's tariffs, which are continuing to fuel a global trade war and recession fears despite recent cooling.

A move next week would follow the 0.25% cut in February, which was the first cash rate decrease since November 2020.

With consumer prices decelerating quicker than expected and underlying inflation finally back within the RBA's 2-3% target range, the central bank has some wriggle room.

For mortgage holders, property investors and first-time homebuyers, this is "fantastic news", according to Melbourne-based Mortgage Choice broker Luke Camilleri.

"After the Royal Commission, COVID and consecutive rate rises, we're definitely seeing the sunshine after the rain,” he said.

On a $500,000, 30-year loan, repayments decrease by approximately $80 per month for every 0.25 basis point cut, or $160 for a double rate cut.

Mr Camilleri says enquiry levels have been high since February's rate cut, although global economic uncertainty and the federal election had caused hesitation.

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

"A lot of people are ready to go but not transacting; they're waiting,” he confirmed.

In a time of uncertainty, and with another rate cut poised to boost the mortgage market, it's an ideal time to consult your mortgage broker.

Here are some questions worth asking.

How will another rate cut impact property prices?

Home prices across the county climbed 0.2% in April, which REA Group senior economist Anne Flaherty has attributed to positive buyer sentiment after February’s rate cut.

“Expectations that further cuts are on the cards are supporting buyer sentiment,” she added.

Another rate cut could draw more first-time buyers and existing property owners looking to upgrade into the market, increasing competition and potentially raising prices.

REA Group senior economist Anne Flaherty says buyers are feeling confident ahead of further rate cuts. Picture: supplied

For this reason, rate cuts present mixed outcomes for buyers, Mr Camilleri says.

"Every cut improves borrowing capacity, but also fuels market interest, driving up prices. This can evoke 'FOMO', where buyers feel pressure to get in quickly before they miss out."

Should I have bought before the election?

Federal elections typically cause short-term jitters in the property market as buyers, sellers and investors await potential leadership changes and policy impacts.

With housing policy central was central in this year's poll, not everyone delays making big decisions until the outcome is clear.

Prime minister Anthony Albanese has pledged to allow first homebuyers to purchase with a 5% deposit, avoiding Lenders’ Mortgage Insurance, and plans to allocate $10 billion to build 100,000 new homes exclusively for first-time buyers.

'Can these new election promises solve Australia's housing crisis?: youtube.com/realestatecomau

Mr Camilleri advises first-time buyers with budgets under around $1 million not to waste time however, as some policies may not be implemented immediately or may take time to take effect.

"You don't want to be competing with a surge of first homebuyers entering the market at the same time," he says.

For buyers not in the lowest tier of the market, he cautions against holding back as prices continue to rise.

How will banks react to a double rate cut?

Banks aren't obliged to pass on RBA rate cuts, but with cost-of-living pressures, they face considerable pressure to pass on at least some of the decreases to borrowers.

Mr Camilleri believes banks will likely pass on the cut, possibly even a double cut.

"Many banks, especially smaller ones, automatically pass on RBA cuts, which pressures competitors to do the same."

Smaller lenders could be more likely to automatically pass on cuts directly to home loan customers. Picture: Getty

Even without official cuts, there's room for negotiation, he adds.

"Banks often offer 'under-the-table' pricing, not openly advertised, but available through brokers who can secure better rates."

Your broker will be clocking lenders' responses carefully.

Should I stay with my current lender or refinance? 

Rate cuts tend to invigorate the property market, and banks are eager to capitalise, making it an ideal time to shop around for the best mortgage deal.

You may not need to switch banks; simply asking your current lender for a better rate can be effective.

"A broker will first negotiate with your current lender on your behalf. Sometimes, suggesting you're considering refinancing can lead to better offers. If not, we can initiate the refinance process," says Mr Camilleri.

'Fixed vs. variable interest rates': youtube.com/mortgagechoice

He says mortgage holders should review the market every couple of years.

"Brokers have up-to-date interest rates from lenders and a diligent one will track these rates for you."

Do I have to reduce my repayments?

Even if a rate cut reduces your mortgage interest, continuing to pay the same amount can help you pay off your loan faster.

Review how your repayments are set up: your direct debit may adjust automatically to the new minimum payment, or you may need to request this reduction.

"Some people get their nose out of joint and claim they're overpaying if their payments don't decrease, but maintaining the same payment can help you get ahead on your loan," says Mr Camilleri.

"You can always leave it at the same rate for six months and see how you go."

A broker can assist in calculating how quickly you can pay off your loan at the new rate.

What should I do with my investment property or properties?

Property investors generally face higher interest rates than owner-occupiers. Another rate cut may buy them more options, both in how much they can borrow and also how they structure their loan, says Mr Camilleri.

"Most banks lend you less if your repayments are interest-only, leading many investors to choose principal and interest loans in recent years. However, those with owner-occupied debt might benefit more from an interest-only investment loan, allowing them to focus on reducing their non-tax-deductible home loan."

With lower rates, borrowing capacity increases, allowing some investors to switch from principal-and-interest to interest-only repayments, extend loan terms or put more funds towards their home loan, he adds.

"Alternatively, they could opt for principal and interest to pay off their investment loan quicker."