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With a soft economic outlook, few economists were surprised to see the Reserve Bank of Australia (RBA) extend its record-breaking run of leaving the target cash rate ("RBA cash rate") on hold for the 29th consecutive time.

The market had given just a 4 per cent chance of a change in April, but come September the experts are anticipating a full 0.25 per cent cut to the RBA cash rate.

For homeowners with a mortgage, or those looking to borrow, it can be hard to know what to make of these financial musings; will they benefit or hamper your financial aspirations and goals?

We’ve pulled together the key facts you need to know about RBA predictions and the cash rate to ensure your mortgage continues to work hard for you.

Forecasts aren’t fact

  • When making a prediction about what the RBA will do, economists are taking an educated guess about what could happen in the future, based in the information they have available at the time.
  • When considering if a change to the cash rate is required, the RBA considers various economic indicators including, the inflation rate, unemployment, wage growth, household debt, the Australian dollar and business and consumer spending.
  • At the start of 2019, most economists were in agreeance that a cut was likely, with November earmarked as a potential month for the cut to take place. September is now considered to be the more likely timing now.
  • Australians can expect the Federal Election, global politics and domestic economic challenges to all play their part in the economic (and cash rate) outlook though, so mortgage owners should view longer-term predictions as an indicator of what could happen, not what will happen.
     

What drives rate changes for borrowers

  • Lenders (including State Custodians), obtain funding by issuing bonds in the domestic and global wholesale bond markets. The primary factors that influence a financial institution's cost of funding via this method are the costs of bond issuance and the Bank Bill Swap Rate (BBSW). The BBSW is the benchmark rate used for wholesale funding for financial institutions and fluctuates constantly.
  • If you tuned into an average news report it would be easy to think that the cash rate set by the RBA and the rate you pay for your mortgage are directly linked. But in reality it is variations in the BBSW, which is very much influenced by international factors, that directly impact the cost of funding a home loan and accordingly the interest rates to you, not the RBA cash rate.
  • There certainly is a connection between the RBA cash rate and the BBSW, and historically the two have for most part correlated very closely. However there have been some points in time when this correlation has been interrupted, such as during the global financial crisis in the late 2000s and in the unusual economic circumstances that have been bestowed upon us since 2017 (think Trump and Brexit), when the BBSW started to increase despite no change in the RBA cash rate. This has led all Australian lenders to increase their interest rates since this time.
  • If and when the RBA does make a decision to adjust the cash rate, it is important to understand that the amount of the change will not necessarily translate into the same adjustment on home loan rates. Given the recent volatility of the BBSW it is difficult to speculate the outcome for borrowers of a predicted RBA cash rate cut. However, even with only a loose correlation between the RBA cash rate and the BBSW it is likely that lenders would be in a position to adjust interest rates to some extent.
     

Get on the front foot with your mortgage

  • As a borrower, it always pays to give your home loan a regular health check to make sure that the features, rate and repayment schedule still suits your financial situation and goals. It can also help to make sure that you are well positioned to adapt to a change in interest rates, should one occur.
  • If rates appear likely to increase, choosing a fixed interest rate can help to shield you from additional repayment costs to your mortgage by locking in to an agreed rate for a set period of time.
  • If rates decrease, it’s a good idea to use the opportunity to increase the amount you are repaying to really get ahead on your financial goals.
  • Contact your broker to discuss a health check for your loan.

The opinions expressed in this article are the opinions of the author(s) and not necessarily those of State Custodians. The above is general commentary only and is not advice tailored to any individual’s financial situation. We recommend seeking advice from a mortgage or finance professional before implementing changes relating to your finances.

  • Use a calculator to get an estimate of how much you can borrow. Try one here.

  • See if you qualify. To get a more accurate idea of how much you can borrow with State Custodians, click here.

  • Call our Lending Specialists and they can do the calculation for you over the phone plus answer any questions you have at the time. Talk to us on 13 72 62.