Rates cut an early Christmas gift if banks play Santa too

THE interest rate cut by the Reserve Bank of Australia last week served as an early Christmas present for mortgage holders.

THE interest rate cut by the Reserve Bank of Australia (RBA) last week served as an early Christmas present for mortgage holders. That is, of course, assuming that banks and finance institutions pass on the full rate cut of .25% to customers.

The rate cut brings the cash rate to the lowest level ever at 3.0% and the saving for a $300,000 mortgage holder is $60 per month if the entire cut is passed on to the mortgage holder.

While this is good news for mortgage holders, it does mean that the RBA believes that the Australian growth will slow further in the near future. It has been reported that the Organisation for Economic Co-operation and Development (OECD) is predicting a slowing of Australian growth by almost 1% over the next year.

As the Australian Government is continuing to pursue a budget surplus over the next year, there will not be a large government-funded cash injection into the economy in the next year. Combine this with the continually slowing Global Economy and you have the reasons for the RBA to decide to cut the interest rates again last week.

The good news from a cut is as mentioned, the reduction in finance costs for a mortgage holder. However, as also mentioned this assumes that the banks will pass on the full rate costs.

The RBA deputy governor, Philip Lowe, explained soon after the rates drop that the cash rate has been cut more than in previous years as the Banks were not passing on the full rate cut to mortgage holders.

Mr Lowe's estimate was that the cash rate of today is around 1.5% lower than it would have been under similar economic conditions in days gone by, and that this is the amount that bank funding costs have increased mortgage costs compared to the cash rate.

This is the disappointing news for mortgage holders who do not receive the full rate cuts; however, it is good news from the point of view that the RBA is in effect saying that the economy is not in as bad a shape as the lowest cash rate ever would indicate.

Whichever shape the economy is in, the Christmas season can only help the overall economy - especially retailers, and an interest rate drop prior to Christmas is a timely gift for mortgage holders.

Originally published as Rates cut an early Christmas gift if banks play Santa too