What another rate cut will mean for you

Borrowers can expect further interest rate relief this year, with economists predicting that rates could be slashed by as much as 50 basis points in coming months.

While the Reserve Bank board is expected to keep the cash rate on hold at 3.75 percent when it meets on Tuesday, June 5, economists are tipping a rate cut for the September quarter.

Rates were cut by half a percent last month, but consumer confidence data so far showed it had not worked.

Commsec economist Craig James said he favoured waiting until August for another cut following June inflation data, but he thought a 25 basis point cut at least was likely.

“We haven’t had too much of a response to the interest rates cut, the bad news in Europe basically serving to offset any stimulus being applied here in Australia,” he said.

HSBC chief economist Paul Bloxham was more pessimistic, telling News.com.au that with global economic conditions worsening that the cash rate would be reduced by 50 basis points in coming months.

“As we pointed out at the beginning of the year, global risks were the elephant in the room,” he said.

“The elephant has clearly grown larger since then.”

AMP chief economist Shame Oliver agreed, saying a 50 basis point cut was needed with China’s economy slowing more than expected and Australian home sales poor with the cash rate to hit 2.75 percent by year’s end.

Most lenders in the RateCity database have now passed on some of the Reserve Bank’s 50 basis point rate cut last month.

Michelle Hutchison, spokeswoman for RateCity, said on average lenders had passed on a 32 basis point rate cut to customers, reducing the average standard variable rate to just 6.61 percent.

“A 25 basis point rate cut would therefore mean borrowers could expect to see variable rates in the low 6 percent to high 5 percent range,” she said.

“If lenders pass on the full 25 basis points cut, monthly repayments for a $300,000 mortgage would drop by $49.”

A 50 basis point reduction in coming months would put almost $100 back in borrowers’ pockets.

RateCity estimates that there are over 1.1 million households paying more than the minimum on their mortgage. If they could afford to keep repayments at the pre-rate-cut level, Hutchison says they will be much better off by doing so.

“Every dollar extra that you add to your home loan goes directly to reducing the principal. Adding an additional $50 per month to a $300,000 mortgage (based on a rate of 6.61 percent), borrowers stand to save more than $34,000, reducing a 30-year loan term by more than two years,” she said.

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