How to prepare for lower interest rates

Many economists are predicting rate cuts as early as this year, so what moves can mortgage holders and savers make to prepare?

In early November last year the Reserve Bank Board lifted the official cash rate by 25 basis points to a 12-year high of 4.35%.

Three meetings and three rate holds later, the cash rate remains unchanged. But in its statement following the recent March meeting, the Board made a small, but potentially significant tweak.

In February the Board stated that a 'further increase in interest rates cannot be ruled out', but in its latest statement the mention of further rate increases was removed, with the Board instead noting that it was 'not ruling anything in or out'.

Gareth Aird, head of Australian economics at the Commonwealth Bank, pointed out in a research note published after the March meeting that while the change in language reflected comments RBA governor Michele Bullock had already made, it was still noteworthy.

"The removal of the hiking bias means the RBA Board is now more confident they will not need to raise the cash rate again compared with a month ago."

So after 13 rate hikes in the last two years, could there be a feint glimmer of lower interest rates somewhere on the horizon?

Read on for an overview of what some experts are forecasting on the rate cut front, as well as the action homeowners and savers might want to think about taking to prepare.

When could interest rates go down?

While the Reserve Bank is being understandably cautious in not ruling any future rate moves in or out, there's been no shortage of forecasts from economists and other experts.

In a recent poll conducted by comparison website Finder, 21% of the 28 respondents said that they believe that the RBA will cut rates before July, while 54% said that the first cut would come at some point between August and the end of the year.

The remaining 25% of respondents said that they don't anticipate the central bank to start reducing the cash rate until next year or later.

The outlook from Australia's four largest banks is similar. ANZ (late 2024), the Commonwealth Bank (September), NAB (December) and Westpac (September) are all currently forecasting that the Reserve Bank will make its first move to lower rates at some point in the second half of the year.

"The Board's priority is still to ensure that inflation returns to the 2-3% target range. But the flow of recent data suggests that (absent some shock) no further rate hikes are needed to achieve this," Luci Ellis, Westpac Group's chief economist, noted in a recent report.

"Given that recent data flow and the shift in the RBA's language, we continue to expect that the RBA is on hold until its late-September meeting,"

What can mortgage holders do to prepare for lower rates?

"If the RBA does decide to cut the cash rate, mortgage rates will start to come down and we think that banks will pass on that first cut pretty quickly to avoid being called out by the media," says Rachel Wastell, spokesperson for financial comparison website Mozo.

In the meantime, Wastell has a few suggestions for homeowners with a mortgage, the first of which is checking in on their home loan rate to ensure that they can be prepared to jump on a better offer if competition in the market starts heating up again.

"We recently released some research which found that 42% of mortgage holders don't know their interest rate. You might know how much you're paying, but if you don't know the rate you're on you can't compare that to others on the market to see if you can get a better deal."

Wastell also recommends that borrowers maintain their current level of repayments even if their lender lowers the interest rate.

Given the levels of mortgage stress many homeowners are experiencing at the moment, this won't be an option for everyone, but for those who can afford it, it can be one way to pay off the loan faster and reduce the total interest paid.

On the subject of reducing interest, Wastell also suggests that borrowers employ the simple trick of switching their repayment frequency.

"If you're on a monthly repayment and you were to halve that, then make the repayment fortnightly, you would end up making two extra repayments a year. We calculated that that could save you $111,000 of interest on a $500,000 principal and interest loan over 25 years."

Fixed or variable rate: What's the play?

During the first two weeks of March, Mozo recorded 275 cuts to fixed rate mortgages and just four increases among the lenders being tracked in its database. By comparison, there were 38 cuts to variable rates and 111 increases over the same period.

It's not a surprise then that the average variable rate in Mozo's database for an owner-occupier (6.83%) is higher than the average fixed rates on offer. For example, the average rate for a 1-year term is currently 6.48% and the average for a five-year term is 6.52%.

Wastell recommends that mortgage holders approach fixed rates with caution at the moment though - especially long-term deals.

"Fixed rates are a little bit lower at the moment than variable rates, so borrowers might be wondering whether they should fix.

"Fixing for a year could be one way to save a little bit over that period, but if you're fixing for three to five years and the RBA does end up cutting variable rates by more than that, you could end up on a fixed rate that's higher than the variable rates on offer."

How can savers prepare for lower rates?

While Australians with a mortgage will be cheering on the prospect of lower repayments in the future, savers are unlikely to be thrilled by the prospect of diminished returns on their savings. So is it worth considering locking away money in an account like a term deposit?

"It's likely that rates on these funds will fall when interest rates fall which may make them less attractive," says financial adviser, Helen Baker.

"So if you have funds on the side and you want to lock them in, ask yourself if you should do that quickly before rates change.

"Consider the purpose of those funds though, how much risk you want to take going forward, and how they fit or don't fit with your situation. For instance, does it make sense to stay as you are but absorb the hit on the return, or should you look at alternative investments?"

Because of their variable nature, rates on savings accounts are naturally more vulnerable to any future cash rate changes.

Wastell says that this makes it all the more important for savers to get the highest rate they can with an account that suits their needs.

"A key tip for people who are looking for a high interest savings account is that if you're not good at meeting the bonus conditions each month there are some really high base rates around.

"Australian Unity is one bank obviously trying to get some attention right now because they've got a 5.20% base rate. That's not that far off the highest bonus rate in our system which is 5.55% p.a."

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