RBA historic rate cut: Five steps you must take

 

Home loan customers have entered for the first time a world where the cash rate is below 1 per cent.

The Reserve Bank of Australia cut the cash rate to a new record low of 0.75 per cent, with the board prepared to go even lower if the nation's economy does not respond.

The RBA had reduced the rate in both June and July in an attempt to shake the country out of economic stagnation, holding at 1.0 per cent during August and September as it observed whether the cuts - as well as the federal government's tax offsets - had flowed through to the economy.

RBA Governor Philip Lowes said the RBA would consider cutting rates to 0.5 per cent in order to support sustainable growth, full employment and the achievement of the inflation target over time.

Callam Pickering, APAC economist at jobs site Indeed, said Australia could expect another rate cut early in 2020, enhancing the possibility of unconventional measures.

"In the absence of meaningful fiscal stimulus, quantitative easing may soon be inevitable," Mr Pickering said.

Here are five things borrowers should do now to ensure they reap the benefits of today's cut.

 

1) SEE WHAT YOUR LENDER DOES

Hold your breath for a moment because bankers need to line their pockets first.

Make sure you are following the news because we are now waiting to see what banks do next.

Just remember, banks don't always pass on rate cuts in full.

Swing back to June and July - of the big four banks between them none passed on the two 0.25 percentage cuts in full.

The Commonwealth Bank and National Australia Bank passed on 0.44 percentage points, ANZ passed on 0.43 percentage points while Westpac was the stingiest and passed on just 0.4 percentage points.

 

2) CHECK YOUR RATE

Don't be stunned, but there's a lot of Aussies out there who have no idea what their home loan rate is and that may include you.

Log into your online banking, check your banking app or phone up your lender and see what rate you are being charged.

On a $300,000 30-year owner occupier principal and interest home loan you should be chasing a rate under 3.5 per cent.

If you are on anything higher than this it's time to take action.

Borrowers should phone their bank’s mortgage retention team and demand a better deal.
Borrowers should phone their bank’s mortgage retention team and demand a better deal.

3) PAY EXTRA

Without sounding like a broken record there's truth in experts saying, "rates won't be this low forever".

While some smaller lenders are offering deals below 3 per cent, factoring in today's cash rate cut there will be more joining the "2" per cent club.

So it makes sense to pay extra off your loan if you can because borrowing is so cheap.

On a $300,000 30-year home loan with an average rate of 3.91 per cent, if you paid an extra $100 per month on top your $1420 monthly repayments, you would save $28,000 in interest charges and slash three years and six months off the life of the loan.

Or on the same loan if you paid an additional $200 per month you would save $49,200 in interest charges and cut six years and two months off the loan term.

4) PHONE YOUR BANK

If you think you are getting the raw end of the deal from your bank, phone them up.

Ask for the mortgage retention team and tell them you want to give them the flick.

Reel off some competitor's rates that are better than what you are getting and see what they do for you.

There's a very good chance they may come to the party and drop your rate, because don't forget it costs the bank more to find new customers than it does to keep existing ones.

5) SWITCH LENDERS

If you're not happy with what your lender is doing and they have failed to come to the party then there's no alternative than to switch.

Mortgage exits fees were banned back in 2011 making it far easier to switch, but remember if you are on a fixed-rate loan it will be harder and more expensive to break the loan and jump lenders.

If you need assistance in switching seek a professional to help you including a mortgage broker.