RBA to hold, borrowers should plan for the worst and pocket the savings

The Reserve Bank of Australia is expected to keep the cash rate on hold today at 4.35 per cent for the seventh consecutive meeting, after last week’s labour force figures landed stronger than expected. 

Australia’s jobs market gained 47,500 new roles in August, giving the RBA cause to keep rates on hold for the rest of this year, even as the US Federal Reserve made its first rate cut this decade. 

While the next move from the RBA is expected to be a cut, Governor Bullock is likely to once again, refuse to rule out anything at the Board’s post-meeting press conference this afternoon.

Borrowers should still prepare for the worst – another rate hike – and build a buffer to be on the safe side. 

Impact of another 0.25% pt rate hike 

Based on an owner-occupier variable borrower paying principal and interest 

Source: RateCity.com.au. Notes: based on an owner-occupier paying principal and interest on the RBA average variable owner-occupier rate of 2.86 per cent at the start of the hikes. Assumes a hike is in November 2024 and that the borrower has not renegotiated their rate since the start of the hikes.

How can borrowers build a buffer in their mortgage?

Negotiating their current interest rate by either haggling with their existing lender, or refinancing to a lower rate loan with a new lender should be a borrower’s first step. 

Another strategy is to consider chipping in extra cash. You could do this by planning for a rate hike and making the higher repayment, even if it doesn’t eventuate. 

Not only will this help borrowers build a buffer in case of a rate hike, it will also see them pay less interest to their bank. 

RateCity.com.au research shows if a family with a $500,000 mortgage added the equivalent of one 0.25 percentage point hike, or an extra $75 per month into their loan, they would reduce their loan balance and therefore build a buffer of $1,005 in the first year. 

If they went on to keep making these extra repayments for the remainder of their loan, they would potentially save $25,038 in interest and pay off their loan 1 year and 2 months early. 

Impact of higher repayments into the mortgage

Source: RateCity.com.au. Notes: based on an owner-occupier paying principal and interest with a $500,000 debt and 25 years remaining. Assumes mortgage rates change in line with the cash rate forecasts from ANZ and that the cash rate remains at 3.10 per cent thereafter. Assumes banks do not use a borrower’s extra repayment balance when recalculating monthly repayments.

RateCity.com.au money editor, Laine Gordon, said: “If you’ve got a mortgage, don’t count on a rate cut anytime soon, instead keep your head down and your repayments up as much as you can.” 

“The RBA is looking less likely to pull the trigger on any cash rate cuts before the end of the year,” she said. 

“While the next move to the cash rate is likely to be down, not up, if you’ve got a mortgage, put the idea of rate cuts out of mind and plan for another hike, to be on the safe side. 

“A rate hike might not be on the cards, but building a buffer can be a lifesaver in times of need and get you ahead.

“You can do this by chipping in extra cash to your mortgage in the form of extra repayments. Finding any extra dollars in the budget right now might feel impossible, but that’s one family take-away meal per month that could end up saving you in the long run,” she said.

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