The interest rate cuts happening behind the scenes

By Tony Kaye, Senior Personal Finance Writer

Markets and economy

Interest rates are officially on hold, but unofficially they’re not.

Don’t expect an official rate cut anytime soon.

That was the message from the Reserve Bank of Australia (RBA) last week as it kept its policy cash rate on hold at 4.35% and ruled out any near-term prospect of an official rate reduction.

There’s even a question mark over whether rates may need to go even higher.

“We’re watching the data closely and we’re not ruling anything in or out,” said the RBA’s Governor, Michele Bullock.

So, where does this leave borrowers and savers? On the surface, the RBA’s rate freeze would seem to leave most borrowers out in the cold. Loan repayment rates will remain elevated for now.

For savers, who prefer higher interest rates, the latest rates hold would appear to give additional comfort that income payments from savings will be staying higher for longer.

Yet, on a retail level, a different rates scenario is already playing out in anticipation of one or more RBA cash rate drops during 2025.

In fact, there’s been a flurry of rates activity over recent months. In addition to reducing their rates on fixed term home loans, many Australian financial institutions have also been reducing the income rates they are paying to savings accountholders.

So, it’s probably a good time to start watching the retail interest rate moves in both areas as they may present opportunities for borrowers and savers, especially when a RBA rate cut does eventuate.

By shopping around, or negotiating with their existing lender, borrowers may be able to secure lower loan interest rates, even in the current environment.

Refinancing debt

Lending indicators data released by the Australian Bureau of Statistics shows around $16.4 billion of debt was “externally refinanced” during the month of September.

This relates to existing loans that were refinanced during the month with another lender, and the level of activity indicates that borrowers are still shopping around for better mortgage deals.

The prospect of one or more rates cuts in 2025 is likely to accelerate mortgage debt refinancing activity as lenders move their rates lower in order to retain their existing loans customers and attract new ones.

Variable mortgage interest rates have been largely static over the last year but can be expected to start falling gradually once the RBA begins reducing the cash rate.

Lower rates may also present opportunities to refinance other forms of debts, including personal loans. However, borrowers need to be mindful of potential early loan repayment penalties and should review their loan documentation.

 

Hunting for yield

The flipside to lower loan interest rates is lower savings account rates.

In that sense, as financial institutions move to reduce their savings rates, it may be worthwhile considering alternatives offering higher income return rates.

This could include accounts with higher saving rates offered by the either same institution or others.

Another alternative could be fixed interest investments such as bonds, which can be readily accessed through managed bond funds such as exchange traded funds (ETFs).

Bonds are a type of investment security that enable investors to lend their money to a bond issuer for a set term in return for regular income payments based on a fixed or floating interest rate.

Bond issuers are typically governments, large organisations and companies, which often choose to borrow large amounts of money for different purposes from a pool of investors via the global bond market.

When the term of a bond issue expires the issuer is expected to repay investors their principal investment amount in full.

 

Increasing cash flow

By shopping around, or negotiating with their existing lender, borrowers may be able to secure lower loan interest rates, even in the current environment.

Reduced loan repayments add up to increased income, which can either be used to pay down debts more quickly or redeployed into other areas such as superannuation or other investments.