RBA Rate Cuts: How Low Can You Go?

The Interest Rate has dropped by 25 basis points to a historic 2% last 6 May 2015 to further stimulate the economy and has raised concerns on the current state of the housing market. The Reserve Bank, in its decision has shown signs of further rate cuts, stating that “The board will continue to assess the outlook and adjust policy as needed to foster sustainable growth in demand and inflation outcomes consistent with the inflation target over time”.

The expectations for the RBA to keep rates on hold have fueled fears of a bubble – like condition for the housing market, particularly in Sydney which might lead to financial instability in the near future.  Chief Economist for AMP Capital Dr Shane Oliver said that even with the risks involved, “It is dangerous to set monetary policy based on one city”.

Treasurer Joe Hockey has supported the RBA’s move to cut the official cash rate and has urged Australians to borrow more to further stimulate the economy.

With the RBA open for more cuts ahead, how low can the interest rates go?

The 25 basis point decrease in the official cash rate on a $300,000 mortgage has decreased the monthly repayment by $44, with the lowest variable rate down from 4.23% dropping to 3.98%, according to comparison website Mozo.com.au. If homeowners decide to pay the same amount prior to the rate cut, they cut their mortgage payments by 13 months.

Comparison website Finder.com.au is expecting rate hikes to start as early as February next year, with their survey expecting a rise to 4%, peaking at 7.1%. Borrowers are encouraged to make weekly and fortnightly payments to take advantage of the rate cuts. Better to take advantage before it’s too late.