For the 15th consecutive month, the Reserve Bank of Australia has decided to leave interest rates on hold.
We chat with our resident home loan and property market expert, Jessica Darnbrough to get her take on today's RBA cash rate decision.
Why has the Reserve Bank decided to leave rates on hold?
The RBA's decision to leave rates on hold for another month hasn't really raised any eyebrows around the industry water cooler. In the last few months, consumer sentiment (usually a good indicator for changes in the official cash rate) has hovered below 100 index points, which has been seen as a bit on the low side for the last 8 months.
Despite this trend though, in October, consumer sentiment rose by 0.9% which is quite positive, particularly considering that both the Australian dollar and the Australian share market have fallen about 6% over the last month.
In addition, it's likely the RBA will also have considered the recent NAB Monthly Business Survey. NAB reported that business confidence has also been dropping and is now at it's lowest level in 4 months.
So it seems that with both consumer and business confidence meandering at low levels, the RBA has been forced to keep the official cash rate on hold for a record 15 months.
How does the cash rate impact a home loan interest rate?
The Reserve Bank of Australia sets the official interest rate based on how they believe the economy is performing. They take into account a number of factors from the strength of the aussie dollar and unemployment rates through to our domestic and international economy. Based on the rate the RBA establishes each month, your lender will then adjust the interest rates they charge for their home loans.
The RBA cash rate impacts all home loans, but often more notably variable interest rate home loans. For those of your looking to get, or who already have a variable rate home loan, you'll see your loan rates fluctuate with the market and with the RBA's rate. When the RBA's interest rate rises, so too might your home loan's rate and the size of your repayments. Conversely, if the cash rates goes down, your lender may then pass through this decrease and you will see a decrease in your home loans interest rate.
On the other hand, when you have a fixed rate home loan, you're locking in a set interest rate for a period of time (lenders vary on what they'll offer, but most offer anything up to 5 years at a set rate). This can be ideal if you want predictable repayments as you're not affected by any interest rate hikes that come through in the fixed period. Unfortunately, the down side is, that if we do see the RBA lower rates and your lender does the same, you don't get to benefit from the lower interest rate.
Knowing how the cash rate works can have a big impact on how you negotiate your home loan. We've seen a number of people look to refinance their existing loan because they want to take advantage of the lowest interest rates in years and potentially save themselves a great deal of money and lower their repayments.
With this being the 15th month that the RBA has kept rates on hold, lenders are also offering extremely competitive fixed rate terms for up to 5 years. This can be ideal for those that want to lock in a predictable and low rate, so many are jumping in and securing their home loan with a fixed rate.
What's likely to happen to the coming months to the official interest rate?
The RBA has talked pretty openly about ways to cool the property market. However, I think it's unlikely that one of the options they'll choose in the immediate future is cash rate hike.
As we've seen, consumer and business sentiment are already lower than ideal, and a lift in the official interest rate would likely only mean negative things for both of those indexes. It seems, at least for the short term, that rates are likely to stay on hold.
So, with rates still on hold, it looks like now could be the right time to do a quick review of your current home loan to see if you can take advantage of the current interest rate climate.
Of course, if you're still yet to take that leap into the property market, it's worth chatting with your local mortgage broker. Now is a great time to buy particularly as we head into what is traditionally the hottest selling season.