Bruce Brammall: What homeowners should do first if the Reserve Bank cuts rates

It feels like getting a bonus. Extra cash you feel you deserve for all your hard work, weathering tough times. But you can never be sure until it arrives.

And it has been tough. Household stresses have been building up (though not for everyone).

Yep, I’m not talking about an actual bonus. But an interest rate cut.

One rate cut could deliver some relief. Will it be just one? Will there be a few?

We don’t know when it’s going to arrive, or how big it might be. It could happen at 11.30am WA time tomorrow. Money markets are reasonably certain it will. But it might not.

Let’s say it comes. And it’s 0.25 per cent. On a $700,000 mortgage, that’s about $110 a month, a little over $25 a week.

What are you going to do with it?

On its own, how much of a difference will it really make? For most, probably not much. It might just slow how deep the hole they’re in is getting. For others, it might be enough to stop them going backwards.

Some might get to “cashflow positive” each month. There are those who have sailed through and it won’t make much of a difference to them anyway — perhaps because they had smaller mortgages.

Depending on the size of your mortgage, a 0.25 per cent rate cut is probably not going to make a hell of a dent in much. If it’s a bigger cut, maybe.

It might take until a second cut to make a noticeable difference. But we can’t bank on that. And certainly not soon.

Making it work

Let’s have a little refresher, because it’s been a while.

The last time we received a first rate cut after the peak of a raising cycle was November 2011. Yep, more than 13 years ago, when rates got cut from 4.75 per cent to 4.5 per cent.

Few will remember what they did back then. And most who do remember will be in a very different financial position right now. This will be a first for most people with big mortgages.

If — or when — it arrives, the first thing you need to know is that you are probably going to have to do something to see an actual reduction in your repayments.

Most banks, when they pass on interest rate cuts, don’t automatically reduce your repayments. If your mortgage is $4100 a month before the rate cut, the bank won’t automatically reduce it to the new repayment rate of, let’s say, $3990.

Your repayments will stay at $4100, with the extra $110 or so generally going into your redraw account, where the balance will grow.

In most cases, you’ll need to request a reduction in your repayments, usually online or through the app.

Build the moat

If the cupboard has been a little bare for the past few years, and personal/family finances have been a series of sleepless nights, fight the temptation to celebrate or splurge this “bonus”.

Rebuild that buffer first. Sure, at $25 a month it might take a while. But resist the temptation to blow it.

That might mean not adjusting down your monthly repayments and building the excess repayments into your redraw account. Others might just build up their savings.

Chance to refinance?

A rate cut or two might also provide some with the ability to leave their lender and finally get themselves a better rate.

Banks need to add 3 per cent to the rate they’d offer you to see whether you could service a loan with that many rate increases (known as the “servicing buffer”).

In recent years, the servicing buffer has made it impossible for some to leave. While you can afford your current loan’s crappy interest rate, you can’t meet the +3 per cent servicing buffer requirements at a new bank.

Is this your opportunity? If you’ve been stuck on a rate 0.5 per cent higher than you could get elsewhere, but you’ve just been failing to qualify, this 0.25 per cent cut might mean you can get yourself a 0.75 per cent reduction in your rate.

Have some sympathy

And if you get a rate cut, spare a thought for your parents or grandparents who don’t have a mortgage and are living off their savings. They will also soon start to lose income from reduced interest rates on their savings.

Fingers crossed. Be sensible.

Bruce Brammall is the author of Mortgages Made Easy and is both a financial adviser and mortgage broker. bruce@brucebrammallfinancial.com.au