Decision to cut rates by 25 basis points will help spending and lift spirits: Mortgage Choice, RateCity.com.au

Mortgage Choice says today’s 25-basis-point rate cut was expected following a “somewhat subdued reaction to last month’s 50-basis-point rate cut, soft retail sales, weak consumer sentiment and concerns over the direction of the global economy”. 

“The second consecutive monthly cash rate cut will hopefully boost borrowers’ spirits by helping to increase their ability to repay their home loan,” says Mortgage Choice spokesperson Belinda Williamson. 

“Borrowers should be putting heat on their lender to pass on the full 0.25 percentage point rate cut savings." 

According to Michelle Hutchison, spokesperson for financial comparison website RateCity.com.au, today’s cash rate reduction should help boost spending following numerous signs that Australians don’t have confidence in the economy, including low take-up of mortgages, poor retail spending figures and banks holding a record $544 billion of consumer savings, according to APRA. 

“Even if lenders only pass on 20 basis points of this rate cut, by July, variable interest rates will have fallen by 92 basis points since October 2011, and variable-rate borrowers on a $300,000 mortgage would be paying $184 less per month in repayments,” she says. 

“In November 2009 when the cash rate was 3.5%, the average standard variable rate was 5.75%. 

“Even if lenders pass on the full 25 basis points this month, the average standard variable rate would still be 6.33%, which is 58 basis points higher than November 2009. So this means variable borrowers could be paying about $112 more per month for a $300,000 mortgage compared to November 2009,” she says. 

Tim Lawless, national research director at RP Data, says the rate cut will provide a further boost to housing affordability, “which the RBA has recently suggested is back around levels not seen since 2002”. 

“The big question now is how much of the rate cut will be passed on by the banks privately and whether this will be enough to provide a shot in the arm for the housing market. 

“Our latest index data showed capital city home values fell by 1.4% over the month of May, which is a factor the Reserve Bank would have been conscious of when deliberating their interest rate setting. Such a significant fall over a single month was unexpected, considering the cash rate was slashed by 50 basis points in the same month.  Not only did home values fall further in May, but we also saw consumer sentiment remain fairly steady, suggesting the May rate cut has had little effect in stimulating consumer confidence and spending,” says Lawless.