More interest rate cuts on the way in 2020 so this is what it means for you
More interest rate cuts are expected in 2020 with never before seen deals. Sophie Elsworth explains what it means for borrowers and savers.
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More interest rate cuts on the horizon in 2020 which should deliver home loan borrowers deals they have never seen before.
Already customers have lapped up deals with a “2” in front but more reductions are forecast to be on their way in the coming months.
A sluggish economy, rising costs of living and flat wage growth are among the key factors holding back consumers from spending, leaving the nation’s financial state in worrying times.
In the new year customers should be seeking out interest rates in the high two’s or low three’s to allow them to smash down their debt at a record pace.
The ability for borrowers to squash mortgage debt has never been better – the lowest deals on the market are sitting at just 2.69 per cent.
The Reserve Bank of Australia’s governor Dr Philip Lowe handed borrowers a triple treat in 2019 by slashing the cash rate three times to a record-low of 0.75 per cent.
So let’s take a look at what rates will do in 2020.
1. MORE RATE CUTS
Buckle in for more savings coming your way because experts are predicting the cash rate to fall possibly multiple times in 2020.
HSBC chief economist Paul Bloxham expects “one more cut to 0.5 per cent and then we will see what happens”.
“But we see a reasonable probability that the Reserve Bank may have to actually do more,” he said.
However if further rate cuts don’t stimulate the economy it could result in quantitative easing – or more simply known as printing money.
Through QE, the RBA could create money by effectively printing more cash and purchasing assets in financial markets including government bonds from pension funds and insurance companies.
This is done in the hope of increasing money supply and helping drive lending and investment.
But until then financial comparison website RateCity’s spokeswoman Sally Tindall said owner occupier borrowers making principal and interest repayments could see rates fall as low as 2.45 per cent in the new year.
“The RBA is likely to deliver at least one more rate cut in 2020, sending the cash rate down to a historic low of 0.5 per cent,” she said.
“If this happens home loan rates for owner occupiers are set to fall below 2.5 per cent, potentially even as low as 2.45 per cent.”
The banks have been under intense scrutiny this year when rate cuts have been announced to see whether they pass on the reductions in full.
Of the three cash rate cuts totalling 0.75 per cent the big four banks did not pass them all on in full.
NAB passed on 0.59 percentage points, CBA and ANZ passed on 0.59 percentage points and Westpac passed on 0.55 percentage points.
2. MAXIMISING LOW RATES
Luke Cust, 35, and his partner Sandeep Randhawa, 40, purchased their one-bedroom apartment in Murrumbeena in Melbourne’s southeast in 2016.
They recently refinanced their $345,000 mortgage to save themselves in interest costs.
The pair was paying an interest rate of 3.72 per cent with ANZ before switching to HSBC.
They are now paying a variable rate of 2.95 per cent.
“I rang ANZ a few times and they reduced our rate a little bit but I knew we could get a better rate elsewhere,” Mr Cust said.
“It was pretty easy to do once we had all the documents.”
Since refinancing the couple’s fortnightly repayments have fallen from $834 to just $794.
The pair also requested a 26-year loan term to help pay off their debt faster, rather than resetting a new loan at 30 years.
Borrowers are being urged to pay as much over the minimum repayments as possible, to help reduce the principal quickly while rates are low.
Mortgage Choice broker Tim Leonard said there’s both good fixed and variable rate deals on offer.
“People should continue on with their existing repayments and not reduce their payments in line with rate cuts,” he said.
“If you are paying $1200 per month now and rates do drop don’t reduce your repayments.”
For an owner occupier borrower paying principal and interest on a loan at 4 per cent, their monthly repayments would be $1432.
They would pay $215,600 in interest charges over the life of the loan.
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But if they switched to a rate of 3 per cent, the customer’s repayments would fall to $1265 and they would pay $155,300 over the life of the loan.
This is a saving of $60,300 in interest charges over the loan term.
Borrowers could also consider fixing their mortgages but should understand the restrictions that come with these types of loans.
Fixed-rate loans do not usually have offset accounts linked which help reduced the overall interest charges and hefty break fees apply if you decide to exit the loan term prematurely.
3. SAVINGS RATES
HSBC’s Mr Bloxham said while the likelihood of further rate cuts was great news for borrowers it was the exact opposite for savers.
“We are moving into unprecedented territory and we expect to move further into it next year which means deposit rates are very low,” he said.
“The challenge here is deposit rates are at rock-bottom so to get a higher return you need to look at other asset classes.”
He said this could include investing in shares or property but reminded Australians “these are risky assets”.
Ratecity’s Ms Tindall said the outlook for savers right now remained “anywhere from grim to dire”.
“Savings rates currently climb as high as 2.25 per cent but another rate cut is likely to see that fall away to two per cent – and that’s for savings accounts offering the highest rates,” she said.
“A lot of ongoing savings rates are hovering just above zero so there’s nowhere for them to go.”
RateCity’s database showed the average savings rate is 0.9 per cent but if there was another rate cut in 2020 the average rate could fall below 0.7 per cent.
INTEREST RATE TIPS
• Check the interest rates you are paying.
• Do an online search to see what else is available.
• Contact your bank to get a better deal.
• If they don’t come to the party consider switching.
BEST VARIABLE RATE DEALS
1. Reduce Home Loans, Low Rider and Rate Slasher, 2.69 per cent, $1215 monthly repayments.
2. Homestar Finance, Star Essentials Home Loan, 2.74 per cent, $1223.
3. Freedom Lend, Variable Home Loan, 2.79 per cent, $1231.
4. Pacific Mortgage Group, Standard Variable Home Loan, 2.79 per cent, $1231.
5. Tic Toc, Live-In Variable, 2.79 per cent, $1231.
BEST THREE-YEAR FIXED RATE DEALS
1. UBank, three-year fixed, 2.69 per cent, $1215.
2. Pacific Mortgage Group, Fixed Home Loan, 2.74 per cent, $1223.
3. Well Home Loan, Well Balanced three-year fixed, 2.74 per cent, $1223.
4. BankVic, Premium Home Package, three-year fixed, 2.75 per cent, $1225.
5. Kogan, Essential 100 per cent offset fixed and three-year fixed, 2.77 per cent, $1228.
Source: Ratecity.com.au.