Rate cut imminent

An official rate cut seems all but a certainty, with financial commentators tipping at least a 25-basis point reduction at tomorrow’s Reserve Bank board meeting.

Somewhat less certain, is by how much the cash rate will be slashed; with some predicting that at least 50 basis points will be wiped off rates, come June.

Damian Smith, chief executive of RateCity, said a rate cut on Tuesday will, no doubt, ease financial pressures on households around the country, and provide a much-needed shot in the arm for retailers.

“If the Reserve Bank cuts the official cash rate by 25 basis points and lenders pass on the full rate cut, borrowers with a variable rate mortgage could save about $50 each month for a $300,000 home loan. If your variable rate is reduced by 50 basis points, you could see your mortgage repayments drop by about $100 each month for a $300,000 mortgage,” he said.

Last week’s inflation figures strengthened the prospect of a cut, according to CommSec‘s Juliette Saly.

“May rate cut virtually foregone conclusion – inflation much weaker than expected,” she tweeted.

While HSBC economist Paul Bloxham said: “We expect the Reserve Bank to cut the interest rate by 25 basis points”.

Based on data published by the Reserve Bank, RateCity estimates that there are over 1.1 million households paying the minimum on their mortgage, according to Smith.

“If they can afford to keep their repayments at [the pre-rate-cut] level, they will be much better off by doing so; they should call their lender to keep their repayments at the same level they are currently paying,” he said.

“And every extra dollar you add to your mortgage goes directly towards paying off your principle. By adding an extra $50 each month to a $300,000 mortgage (using the current average basic variable rate of 6.64 percent) you could potentially save almost $35,000 and reduce your 30-year loan term by over two years.”

But the big question is not whether the RBA will cut rates tomorrow, but rather whether the big four banks will pass on any rate cuts to the 2.5 million households with variable rate home loans.

Brian Johnson, banking analyst from CLSA Asia-Pacific Markets, said: “There’s no way [the major banks] are going to pass on the full rate cut to borrowers”.

“The reason is that increasingly their cost of funding is moving at a different rate to the official cash rate.”

For those customers Smith offers this simple advice: first, before thinking about switching, check whether you have sufficient equity in your home. Second, see what your absolute rate and fees are compared to others, and finally, look (and talk) to some alternatives.

Compare home loans in Australia