Industry super fund-owned bank ME looks at how to navigate today’s super low cash rate environment.
July 2019 saw history in the making when the Reserve Bank of Australia (RBA) cut 0.25% off the official cash rate for the second time in two months, taking it down from 1.25% to 1.00%.
It’s the lowest cash rate ever recorded by the RBA, and it has the potential to affect your money health.
Why the rate cut?
The RBA uses the official cash rate to help steer Australia’s economy towards growth.
The cash rate feeds into interest rates that banks charge on loans as well as the returns paid on deposits. Our economy has recently shown signs of slowing, and the RBA hopes that by lowering the cash rate, it will make borrowing cheaper. This can encourage consumers and businesses to spend more, giving the economy the uptick it needs.
Good news for borrowers
A lower cash rate is great news for borrowers, especially home owners with a variable rate loan. If and when lenders pass on the RBA’s rate cut, home loan repayments fall – putting more money back in borrowers’ wallets.
This means home owners have a chance to pay off their home sooner. Every time home owners pay more than the minimum repayment, the extra amount comes straight off their loan balance.
And it gets better. By lowering the loan balance, the interest charge for the following month is also reduced. This means more of next month’s regular repayment goes toward paying off the principal instead of merely covering interest costs.
Savers – it’s game on to find a decent rate
The flipside to the RBA rate cut is the prospect of lower returns on cash savings. It’s still possible to earn a healthy interest rate on spare cash, but it pays to read the fine print.
Plenty of savings accounts offer what seems like a high interest rate. Scratch the surface though and you could find it’s only a short-term introductory offer. After a brief honeymoon period, the juicy rate dries up to a much lower rate, and you’re left hunting around for better ways to put your money to work.
This is why it can make good financial sense to look for a savings account that pays a consistently strong rate. That way you don’t have to constantly switch your money from bank to bank chasing a high return, or face the hassle of meeting a raft of complicated criteria in order to earn a reasonable return.
Make low rates work for you
We’ve had a long run of low interest rates, and it doesn’t look like it’s ending any time soon. No matter whether you’re a saver or a borrower, the key to navigating the low rate environment is to shop around for value to be sure you’re getting a good deal for your needs.
This article is brought to you by ME. For more information, please visit www.mebank.com.au
It is worth noting that ME has passed on the interest rate cut in full, unlike some of the other big four banks.
Members Equity Bank Limited ABN 56 070 887 679 AFSL and Australian Credit Licence 229500.