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The big four Australian Banks finally reduced their interest rates by 0.25%, to meet the interest rate cut in full, as set by the Reserve Bank of Australia. So, what does this mean for you?

Most people sit in one of two camps.

Camp 1 – Mortgage Holders

If you are in this camp and have a variable mortgage, you are in a position to make some saving. In the table below it highlights the difference per month for various amounts. For a more accurate picture, you can review the Mortgage Calculator.

Yearly and Monthly Savings from the 0.25% Interest Rate Cut

Your Mortgage

Rate Cut

Yearly Saving

Monthly Saving

1,000

0.25%

$2.50

$0.21

10,000

0.25%

$25.00

$2.08

100,000

0.25%

$250.00

$20.83

200,000

0.25%

$500.00

$41.67

300,000

0.25%

$750.00

$62.50

While the amounts do not seem significant, these are ‘tax free’ savings that go straight to you. Secondly, over time these savings can make a significant difference to your loan. Again, the Mortgage Calculator will highlight just how much.

What should you do with the savings?

The RBA did issue a warning when they announced the interest rate cut. The warning can be summarised as  –  ‘The outlook for global economic growth is not good and Australia will not be totally shielded from any negativity’. A couple of days later, Australia’s latest employment figures were released with 40,000 job losses being highlighted. So, the warning signs have been issued that the road ahead could be difficult. With this in mind your considerations should include:

  • Maintain your current repayments – This will help you repay the mortgage more quickly
  • Place savings into a separate account  – To build an emergency fund
  • If you have a flexible mortgage with an off-set account – Save in the offset account as this provides the equivalent to paying off your mortgage while giving you access to the saving
  • Shop around – There are still a different interest rates on offer, so shop around for the best deal and find a benefit greater than 0.25%.

In summary, if you can afford to save the benefit of the interest rate cut – do so.

If you have a fixed interest mortgage, there are limited options. You can have a chat with your mortgage broker/bank manager and discuss the flexibility of the loan that you have. You can also shop your mortgage around with different financial institutions. The fixed mortgage provides benefits when interest rates go up, but when rates come down, they do work a bit against you.

Camp 2 – Bank Deposit Owners

If you are in this camp you have just lost more interest which means less income. This can make it difficult if you are relying upon this income to pay the the bills. The loss in interest is the equivalent to the savings for the people in the mortgage camp (see table above ). Some options to consider:

  • Seek to save a few dollars here and there – Don’t forget, a dollar saved is a dollar earned.
  • If you are receiving Centrelink benefits –  Re-assess your position. Best done at the Centrelink office or with your financial adviser
  • Consider alternatives for some of your deposits –  Talk to a financial adviser
  • If you can’t beat them, join them! – The dividends being paid to bank shareholders is now greater than the interest earned on bank deposits. You carry extra investment risk as a shareholder and that should be considered before buying shares in any of the banks.
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