The Reserve Bank of Australia lowered the official cash rate to 0.75% yesterday, meaning that Australia is officially in the lowest interest rate environment that we have ever seen. This is the third time the cash rate has dropped this year but it was a move that was predicted by experts.
However, what does this actually mean for Australians because after 28 years of growth this event it is uncharted territories for the financial institutions and the Government. Australia’s longest-serving treasurer Peter Costello said that every rate cut brings a little less of a return than the one before and this latest one probably would not do much.
“We’ve already got a cash rate of 1 per cent; suppose it goes to 0.75, suppose it goes to 0.5. Take 25 basis points off, [is that] going to make a big difference? I don’t think so.”
The Big Short did it better than we ever could by getting Margot Robbie in a bathtub with champagne to explain the complex financial stuff.
Unfortunately, we don’t have Margot Robbie at hand to do it, so you’ll have to read it but we promise we have kept it just as easy and brief. There are three main aspects that will impact you but there are ways you can minimise your spend and maximise your money.
View this post on Instagram
1. Ignore everything & stop saving
In a nutshell, forget about savings. This latest cut, according to financial comparison site Mozo will see the average interest rate for savings drop to 0.90%, well below 1.60% inflation. Yes, admittedly the cuts are to bat off a recession so you should be saving some money to prepare, but in all honesty if you’re savings plan is to keep it in the bank then forget about it. You’re pretty much losing money there, as your returns minus inflation means your money is actually worthless in future years.
Even if you’ve read the Barefoot Investor and are with ING, your savings rate is only minimally above 2% and that’s before we find out if the bank will be passing on the cut. Instead, in this environment you should go shopping around for the best deal and a good place to start is with the newer entrants to the market, the likes of 86 400 and Up Bank both offering a competitive rate.
2. But Can I splurge?
Well no it’s not the time and in fact we are sorry to say that it might be time to start paying off your credit card and yes we know how deeply boring of a sentence that is. But think about it, it makes sense. If your savings account is earning you pretty much less than nothing then why bother putting money aside to save? Instead redirect that money to paying off debt. Australian household debts are at a record high to be around 190%, now only a small number of that is due to credit cards but credit cards have the biggest impact on families.
Also just because rates are being cut, your interest on the credit card is not being. Unpaid interest on credit cards can quickly compound and leave you with a bigger debt. So yes we know its not fun, we know its the boring financial advice you never listen to, but if you were ever going to pay off the card now is the time.
3. The Big One: Mortgages
This is obviously the big one. This is the reason more or less for the cuts every time and it is what impacts people the most. Despite this move being predicted to happen, the banks, for the most part, have yet to respond to the cut. CBA was the first to respond and failed to pass on the full cut and as of last October the owner-occupier variable rate will be 4.8% with the investor rate to start from 5.38%. NAB’s new owner-occupier variable rate will be 4.77% and investor rate from 5.37%. Westpac’s owner-occupier rate will be 4.83% and ANZ’s will be 4.79%. So as you can see, huge competition.
For most borrowers, it is likely your rate will be below 4% with the lowest in the market likely to come to between 2.74% and 2.84%. So if you’re with one of the big banks, get shopping. Go look at the other lenders, newer entrants to the market and other banks, there is an opportunity to pay less and you should grab it with both hands.
Now as Margot Robbie said “Got it? Good. Now, f*** off.”