...but move labelled 'double-edged sword'

by Adam Smith07 Dec 2011

Yesterday's RBA cut may not be cause for celebration.

That's the claim of property investment expert Ken Raiss of accounting firm Chan & Naylor. Raiss has labelled the cut to 4.25% a "double-edged sword", and that it could confirm some consumers' worst fears about the Australian economy.

"For some people this will confirm that the Australian economy is heading the same way as Europe and their knee jerk reaction could be to tighten their belts further than they already are. While this will increase cash savings, it will of course further detract funds from equity markets and sectors such as retail, which are already hurting," Raiss said.

This assessment may do little to dampen jubilation among mortgage holders. Non-bank lender Resi has said the RBA's two successive rate cuts will effectively knock more than four years off the average Australian mortgage. The company's CEO, Lisa Montgomery, said borrowers who keep their repayments steady will see even more significant benefits.

"If repayments on a $500,000 loan taken over 30 years were kept at the same level prior to the November rate cut, the borrower can potentially reduce the term of their loan by five years and nine months - which equates to almost 20% off the term of their loan. That figure alone is a real game-changer which can significantly improve the financial plans of many mortgage holders – and that’s why they should be looking at that strategy if they are able to," she said.

The Housing Industry Association was also quick to praise the rate cut. Chief economist Harley Dale said the cut was insurance against a Eurozone meltdown rather than a concession that one was inevitable.

"“Hopefully the situation in Europe doesn’t deteriorate markedly from here. If it does the RBA has
taken out some further, appropriate insurance which doesn’t dilute its ability to engage in more
aggressive action in early 2012 should that unfortunate outcome prove unavoidable," he said.

Raiss also said there was a positive message in the RBA's move, particularly for property investors.

"An interest rate reduction will release additional cash flows towards low capital growth within investment properties. This will allow more savvy investors an opportunity to selectively target properties that are yielding good returns and higher end capital growth for when the property market inevitably improves," he said.

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