Whenever there is an interest rate change, there will always be winners and losers. So who will benefit from the most recent cash rate cut?
On Tuesday, the RBA made the decision to cut the cash rate by 25 basis points for the first time since August 2013 to a record low of 2.25%. People within the housing industry and those who have mortgages will benefit from this cut, however those with interest-bearing investments will not. Five years ago term deposits were paying 6, 7 and 8 per cent as banks were paying more in interest rates due to the GFC.
Term deposit rates were around 3 per cent before this rate cut and now the interest from term deposits will barely be ahead of inflation. As a result, investors and savers may have to take on more risk if they are still going to see a decent return.
As mentioned above, the biggest winners are mortgage holders and those in the property industry. According to Canstar, families are expected to save $44 a month on a $300,000 mortgage. Fixed rates are at a record low, with 5 year fixed rate home loans just over 5 per cent and standard variable home loan rates are just under 5.4 per cent (Canstar).
This cash rate cut will also help support housing construction around the country. According to Housing Industry Association's Harley Dale, "the cut would support residential construction that has generated considerable employment." Australia is currently going through its greatest ever home building boom, with more than 200,000 building approvals in 2014, which is up 8.8 per cent over the year.
Record low interest rates could also see another rush of investors hitting the market as well as those who are not as financially secure. With lower mortgage repayments and fierce competition between lenders, those with less money may be able to apply for a home loan more easily. However, last September, the RBA and Australian Prudential Regulation Authority (APRA) warned they would implement "macroprudential controls" to restrict high risk home loan lending.
So, although this interest rate change is expected to have a great impact on mortgage holders, it is important for borrowers to remember that interest rates can change very quickly. Although interest rates may be at a record low now, it can only take a few months for the rates to jump back up again. In order to protect yourself, you will need to prepare for any interest rate increase now to ensure you will be able to afford the repayments down the track.