{"id":19292,"date":"2019-06-12T14:57:42","date_gmt":"2019-06-12T04:57:42","guid":{"rendered":"https:\/\/www.purefinance.com.au\/?p=19292"},"modified":"2021-03-31T11:30:57","modified_gmt":"2021-03-31T00:30:57","slug":"rba-rate-cut","status":"publish","type":"post","link":"https:\/\/www.purefinance.com.au\/rba-rate-cut\/","title":{"rendered":"How low can we go?"},"content":{"rendered":"

By now you\u2019ve probably seen in the news that the Reserve Bank of Australia (RBA) lowered the official cash rate from 1.50% to 1.25% last week, after almost 3 years of inactivity.<\/span><\/p>\n

While a rate cut is certainly good news for mortgage holders (which should see a decrease in most variable rate loan repayments) that\u2019s sort of where the good news ends. Despite (suspiciously ) positive sentiment from some political <\/em>figures, the economy isn\u2019t actually doing so well. Employment and inflation are still tracking well below RBA targets, with inflation for the March quarter of 2019 coming in at a big fat 0.0%. <\/span><\/p>\n

The GOOD news, however, is that the drop in house prices seems to be levelling out, with talk of an uptick (albeit a slow one) on the horizon. This may help things along, economically speaking, which brings us to\u2026<\/span><\/p>\n

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Rate discounts to be passed on by the major banks<\/strong><\/span><\/h2>\n

Now that the dust has settled, the major banks have released their respective rate discounts to be passed on to mortgage customers, and it\u2019s an interesting array of offerings:<\/span><\/p>\n

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Many have been quick to condemn both ANZ and Westpac for not passing on the full cut to customers, but it\u2019s important for borrowers to remember that what really counts here is their final rate (or \u2018net\u2019 rate). This is the rate you\u2019re left with at the end which is often dependant on the discount that is applied to your loan in its entirety. It is this rate that ultimately dictates what your repayments look like, and that<\/em> is what really counts.<\/span><\/p>\n

It\u2019s kind confusing (naturally) so we\u2019ll try and explain it a bit more\u2026 with coffee!<\/span><\/p>\n

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Let\u2019s say your favourite caf\u00e9 charges you $4.00 for your morning coffee, and because you\u2019re a regular, they offer you a \u2018loyal customer\u2019 discount of 80c. This makes your coffee price $3.20.<\/span><\/p>\n

The caf\u00e9 next door charges $4.00 for the exact same coffee, but they offer a loyalty discount of 20c for regular customers, which means a coffee from them would be $3.80.<\/span><\/p>\n

Now let\u2019s imagine that the coffee industry isn\u2019t doing so well, and, in the interest of boosting sales, all cafes are advised to discount the prices of their coffees by an industry wide 50c.<\/span><\/p>\n

Your caf\u00e9 already prices their coffee a little cheaper than the guys next door, with a pretty generous loyalty discount. So for them, passing on the full 50c might make things a little tight for profit margins. The guys next door price their coffee a little higher to begin with, so they\u2019re in a much better position to pass on the extra 50c discount.<\/span><\/p>\n

If we come back to the banks for a moment, and we look at what they were offering in terms of discounted rates pre RBA cut vs. post cut, we get something like this:<\/span><\/p>\n

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Interestingly, there are a few things to note:<\/span><\/p>\n