The Reserve Bank’s decision to cut official interest rates is good news for anyone with a mortgage or hoping to buy their first home.

However, it’s tricky for retirees and savers.

Depending upon your circumstance, how can you benefit?

On July 2, the Reserve Bank cut the official cash rate for the second month to a record low of 1%.

Many economists predict further cuts, with some suggesting rates could fall to as little as 0.5% in an effort to stimulate the economy and sluggish wage growth, 5% unemployment levels and very low inflation of 1.3% (their target band is typically 2-3%).

So what are your options to take advantage of where rates are?

Grab a better home loan deal

Many banks moved quickly to cut home loan interest rates in the days following the Reserve Bank’s move, although not all of them passed on the full amount. 

The average standard variable rate offered by the big four banks is now between 4.92 and 4.98% saving the majority of variable rate homeowners over $100 a month.ⁱ

Of course many loans are much lower than this, and if your home loan interest rate doesn’t start with a 3…….then it’s time to send me an email as I’m confident that our team can save you money.

Investment	Interest rate/yield %
Home loans standard variable (discounted)	4.92 – 4.98
Home loans 3-year fixed	3.69 – 3.89
Credit cards (low rate)	19.77 (13.03)

Source: Canstar 3 July 2019, *RBA industry average, May 2019The big four also cut their discount rates, while some smaller lenders are offering rates as low as 2.89 per cent. The lowest 1-year fixed rate is below 3 per cent. 

While house prices and interest rates continue to fall, the stars could finally be aligning for Australians wanting to buy their first home. 

The Australian Regulation Prudential Authority (APRA) plans to relax the minimum 7 per cent interest rate banks are required to use when assessing borrowers’ ability to service a home loan.

This could see more first home buyers qualify for a loan or potentially secure a bigger loan than they would otherwise have been able to afford. 

Also, the Morrison government proposes low deposit financing for eligible first home buyers who save a deposit of as little as 5 per cent up to 20 per cent to purchase property. 

The outlook for savers

Lower interest rates can be more challenging for savers. That includes anyone with a savings account as well as retirees who depend on the income from term deposits to help with living expenses. 

Term deposit rates were already on the way down before the Reserve Bank’s rate cut and are likely to head south of 2 per cent.

Banks have also been cutting base and/or bonus rates on their online savings accounts. The best rates are generally on accounts with an ongoing bonus rate of interest if the account is linked to an everyday transaction account. 

The hunt for yield

Investors looking for income are not restricted to bank deposits.

If you have a longer time horizon, growth assets such as shares and property can provide regular income.

That includes pre-retirees and recent retirees who need their money to last for upwards of 20 years or more. 

If you can ride out the short-term fluctuations in share and property prices, the income they provide in the form of dividends (shares) and rent (property) tend to be more stable and reliable. 

The national average rental yield on Australian residential property is sitting at around 4.1 per cent.ⁱⁱ 

Coincidentally, Australian shares currently provide an average dividend yield of 4 per cent (7 per cent after franking) but many quality companies pay more.ⁱⁱⁱ

For example, the big four banks currently offer dividend yields of between 5.2 and 6.8 per cent.

After franking credits are included, the yields grow to 7.5 and 9.7 per cent respectively.

As you can see, in a low rate environment it can pay more to invest in the banks than to deposit your savings with them. 

Whether you plan to borrow or pump up your income, falling interest rates can offer opportunities and challenges. If you would like to discuss the impact of lower rates on your investment strategy, give us a call on (02) 8539 7233.

Investment	Interest rate/yield %
Cash rate	1.0
10-year government bonds	1.32
Term deposits $10,000 1-year	2.5
Online bonus savings account $10,000	2.75
ASX200 dividend yield	4.0
ASX200 dividend yield incl. franking credits	5.7

Sources: Trading economics, Canstar, AFR as at 4 July 2019

i ABC, 3 July 2019, https://www.abc.net.au/news/2019-07-03/what-the-rate-cuts-mean-for-you/11273500 

ii CoreLogic, 1 June 2019, https://www.corelogic.com.au/sites/default/files/2019-06/CoreLogic%20home%20value%20index%20JUNE%20FINAL.pdf 

iii AFR share online market tables, 24 June 2019