What the recent interest rate cut means for you?

In February, The Reserve Bank of Australia announced a 0.25% cut to the Official Cash Rate, which now stands at a record low of 2.25%. This is the first time since August 2013 that the RBA has lowered interest rates, ending an 18 month period of rate stability.

As the RBA continues to address the issues in the economy as a whole, it is worth stopping to consider a question — how would this potential change affect you and your family in the future?

Investors and home buyers

The RBA’s decision to reduce the cash rate comes as a welcome change for the investors and families who want to take out loans on a variable interest rate. A reduction of 0.25% might seem abnormally low on first impressions. With the rate cut, a couple taking out a home loan of $300,000 with an interest rate of 5.35 percent may expect to reduce their loan payments by $20,707, as well as lower their loan term by 22 months if the interest rates remain at this rate.

On the other hand please be aware that the usual mortgage lasts for 25 years and it is highly likely that in the 25 year period of your loan the rates will rise again. This means that when the interest rates do rise again you will be expected to pay much more on your monthly home loan repayments than you are now with the lowered interest rate. At LCU we always assess your ability to pay the home loan at a rate 3% more than the current loan rate. We will only grant the loan if you are financially able to make the payments at the higher rate. Make sure that you have the financial ability to pay your home loan repayments when the interest rates go up because they will at some point.

Shoppers and Business owners

The Australian economy could see a boost in consumer spending, leading to a potential bump in profits for local businesses. The decrease in cash rate will flow on to reductions in interest rates for loans, so this might be the right opportunity to buy that car which has always been just out of reach.

However, don’t expect to find cheaper goods from online retailers. With the Australian dollar currently sitting at 0.76 USD, online imported goods could actually end up costing you more than you would expect.

Job seekers

For those currently seeking employment, RBA governor Glenn Stevens made the disheartening report that unemployment is expected to peak higher than previously forecasted.

But according to AMP Capital chief economist Shane Oliver, it’s not all bad news. Despite the fact that Australia could be seeing its worst unemployment rate in 13 years, Oliver believes that “another rate cut” may result in more job opportunities.