Borrowers and savers shouldn’t sit still as interest rates drop

NOT everybody is pleased with the Reserve Bank of Australia’s decision last week to cut its official interest rate for the first time since 2016.

While homebuyers are happy, savers and retirees who rely on interest from bank deposits have been dealt another blow, with their returns going backwards once the effects of inflation and tax take a toll.

At least one more cut is forecast, so now’s the time for people to rethink their interest rate strategies.

Consumer interest in home loans spiked after Tuesday’s 0.25 per cent rate cut and the announcements that banks and other lenders were passing on all or most of the cut to their customers.

Home Loan platform Lendi said borrower activity doubled within 24 hours of the RBA announcement.

“This may signify an important juncture for the housing market as more buyers are spurred into action, keen to get ahead of the pack and invest while it’s a buyers’ market,” said Lendi managing director David Hyman. “We’re seeing a flurry of existing borrowers doing their research to find out which lenders are the most competitive.”

A rate cut is also an opportunity for borrowers to get ahead on their mortgage.

Finance Brokers Association of Australia managing director Peter White said people who received a cut should try to keep their repayments at current levels so they would be paying more off their loan principal.

“Borrowers will effectively be saving for a rainy day if they keep their mortgage repayments as high as they can afford,” he said. “It’s better to have payments in reserve if conditions deteriorate further.”

People with savings accounts are currently earning around 2 per cent but this will drop as the rate cut flows through to deposit products. With inflation running at 1.3 per cent, savers effectively earn close to zero and this drops below zero for people who pay tax on their interest income.

Plato Investment Management managing director Don Hamson said retirees living off cash-linked income would struggle to make ends meet. “It is very timely for retirees to reconsider their income-generating asset mix,” he said.

“Thankfully, given the somewhat surprising election result, retirees can continue to bank on receiving franking credits from Australian share investments.”

Deakin Business School associate professor in finance Victor Fang said the historically low interest rates were a concern for the economy.

“If the interest margin gets too much closer to zero, there will less incentive for banks to lend money because there’s less profit to be made and depositors will have no interest return on their savings,” he said.