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Buyer’s Tip: What you need to know about the RBA’s cash rate

By Madeline Uto

Throughout the course of 2019, the Reserve Bank of Australia (RBA) has decreased the official cash rate to a historic low of 0.75%. But what actually is the cash rate and how does it affect current property buyers?

What is the Cash Rate?

The cash rate is the overnight interest rate set by the RBA, which determines the cost of borrowing and lending between banks. This interest rate sets the benchmark for the cost of debt (or borrowing) in the economy.

Since October 2010, the official cash rate has steadily decreased, simultaneously decreasing the cost of debt. This is because a lower cash rate reduces the cost of bank funding. This in turn increases banks confidence in their ability to lend money to consumers, and, therefore, they are able to offer lower interest rate loans. The same holds true in reverse; as the cash rate increases, banks are likely to increase the interest rates associated to various loans, as the cost of bank funding increases. This is referred to as monetary policy. It is important to note that the cash rate does not dictate the interest rates set by banks, but rather serves as a guide.

What Affect Does the Cash Rate Have on Current Buyer’s?

As the RBA continues to cut the cash rate, the interest rates associated to various home loans have been decreasing. This means, from a finance perspective, it is the ideal time to consider taking out a home loan.

Below are three of the lowest variable rate home loans discovered by the Money Saving Zone (Mozo):

Things to Consider When Selecting a Home Loan:

Although interest rates may be at an all time low, there are a number of other factors you should take into consideration before taking out a mortgage. Such factors include:

  • Loan eligibility: Have you researched which home loans you are eligible for? Because each bank and non-bank financial institution have their own unique lending policies and guidelines, not every person may be eligible to apply for that specific loan. This is where Mortgage Brokers can become an extremely valuable service. (For budgeting assistance, click here)
  • Your lifestyle and responsibilities:  Are you willing to give up certain luxuries or expenses to fund your mortgage? Will your quality of life be impacted by taking out a mortgage?
  • Finances: Will a mortgage fit into your weekly/fortnightly/monthly budget ? Do you have enough for an equity deposit? Can you afford the extra costs associated with purchasing a property, such as stamp duty and conveyancing fees? (For assistance calculating your mortgage repayments click here)
  • The type of mortgage: Will you have a fixed, variable or split interest rate home loan? Will the loan repayments be fully-amortising, partly-amortising or interest-only? How long will it take for the loan to mature? (For more help selecting the right loan for you, click here)
  • The property itself: Does this property meet all your needs? Is it close to schools? Is it close to public transport? Is it close to shops?

These are all questions you should be asking yourself before purchasing a home. If you require any further advice or assistance on this topic, please feel free to contact our office via the portal below.

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