Who loses out most when interest rates are cut?

The Reserve Bank’s two successive interest rate cuts in June and July this year to a record low of 1 per cent are aimed at stimulating the economy and creating more jobs but, at the same time, have severely disadvantaged some people.

So who are the five biggest losers from the changes?

Savers

At a time when so many people are in so much debt — adding up to a record $2.3 trillion in Australia according to ASIC — savers are big winners. So by the same measure, savers, earning pitiable interest on both standard savings accounts and term deposits, are now doing it tough.

“In aggregate, household debt as a whole is about double the size of interest-bearing assets,” says Matthew Hassan, Westpac senior economist. “But that’s very cold comfort for savers!”

There’s about $526 billion currently sitting in savings accounts across Australia, on figures from financial comparison website Finder. If the banks pass on the full rate cut, those savers could lose about $1.3 billion in interest.

“The smaller online-only banks offer better rates of interest, or savers could go to higher risk, higher returns options,” says Graham Cooke, Finder’s insights manager. “But savers are very much caught between a rock and a hard place at the moment.”

First-home buyers

First-home buyers may already be struggling to raise enough money for a deposit, and the rate cuts will make that task even harder. The sums they’ve managed to accrue so far will be earning negligible interest.

Many deposit account rates have fallen even below inflation in relation to both term deposits and saving accounts, says Sally Tindall, RateCity research director. “Average savings account rates today are around 1.36 per cent, but will fall further as most banks are yet to pass on the July cut,” she says.

In addition, for people hoping to enter the property market, the competitors for the homes for sale are able to borrow more and pay less interest on the loans. As a result, many more may well come into the market, forcing property prices back up. In addition, if the economy does indeed pick up as a consequence of the rate cuts, prices could rise even more quickly.

Retirees

For retirees, hiding cash under the mattress might never before have looked such an attractive option. Those depending on living off the interest on their nest eggs may find that the new low rates could well be swallowed up by bank charges anyway.

“For retirees, it is difficult to get a decent return on savings,” says Cooke. “Traditional-type savings accounts where you put money in and take it out as needed now pay a really low rate of around 0.3 per cent, which is almost nothing. Now we’re finding banks are pushing ‘bonus’ accounts with restrictions on withdrawals instead.”

In addition, the current deeming rules — now under review by the Government — are further disadvantaging pensioners. It assumes money invested in financial assets is earning a particular amount of income regardless of the actual return and, while the rates originally were well below the Reserve Bank’s cash rate, now both the lower and higher rates are above it for the first time ever.

Peter Martin, visiting fellow at ANU’s Crawford School of Public Policy, says: “As interest rates have come down over the past four years, the rate that retirees are deemed to have earned for the purpose of the pension income test hasn’t budged, meaning that although retirees have been earning less, in some cases a good deal less, they haven’t been getting more access to the pension …

“The high deeming rates have meant applicants have been means tested on income they haven’t received.”

Mortgage-holders on fixed rates

People who opted for fixed rates, not believing that interest rates would fall further, can only look on in envy as those on variable rates see the cost of their mortgage being slashed.

About 15 per cent of people signing up for next loans in the last three years opted for a fixed rate, says Ms Tindall. “Of course, it depends on when they fixed, and at what rate they fixed,” she says.

The banks

There aren’t many of us who’ll feel too sorry about banks seeing their profits tumble on having to manage on low mortgage rates. But then again, a strong banking sector is the mainstay of any good economic recovery.

Shaw and Partners banking analyst Brett Le Mesurier estimates that if banks pass on the full home loan rate cut to borrowers, then they’d have to deal with a cut in their profit margin of four per cent, leading to fears their share price could then plummet by up to twice that much. “It’s a hit they can’t afford at the moment,” he says.