The Reserve Bank’s decision to cut interest rates for the first time in four years has triggered a round of celebration among mortgage holders, who will see their monthly repayments decrease. However, not everyone benefits from lower borrowing costs. Many Australian households are net savers, retirees, or prospective homebuyers, who actually lose out when rates fall. For starters, only about a third of households are in debt to the banks when it comes to a monthly mortgage repayment. Another third of households have paid off their mortgage entirely, and so don’t benefit from a reduction in mortgage interest rates. And the remaining third are renters, who also don’t pay a mortgage.

One of the most immediate effects of lower interest rates is their impact on the housing market. With cheaper borrowing costs, more buyers can afford larger loans, bidding up house prices. This is great if you already own a home, but terrible if you’re still trying to buy one. For young Australians locked out of home ownership, a rate cut makes things even harder. It drives prices higher, forcing prospective buyers to stretch their finances further just to get a foot in the market. Reserve Bank calculations suggest that, in the long run, higher house prices from lower rates can outweigh the benefit of lower mortgage repayments. If you’re a saver rather than a borrower, interest rate cuts are unequivocally bad news. Whether you’re saving for a home deposit, retirement, or just an emergency fund, lower rates mean you earn less on your bank deposits.

Many retirees rely on income from interest-bearing assets such as term deposits or cash savings. When rates fall, their returns shrink. The cost-of-living crisis has made it harder for retirees on a fixed income to fund their lifestyles, and a rate cut only makes things worse. While some retirees have exposure to the stock market via superannuation, many prefer the stability of cash savings. With rates falling, they face the tough choice of either reducing their spending or taking on more investment risk in their old age. When the Reserve Bank cuts rates, it tends to weaken the Australian dollar. A weaker dollar makes overseas travel more expensive for Australians. That pint of beer in London, that piña colada in Puerto Rico, or that shopping trip to New York all become pricier.

For Australians planning international holidays, rate cuts are a blow. A strong Australian dollar makes travel cheaper, and lower rates work against that. So while mortgage holders might celebrate, anyone hoping to travel overseas finds themselves worse off. The public narrative around interest rates tends to treat cuts as a universal good, ignoring the many Australians who are left worse off. Falling interest rates are a sign the high inflation that has caused the cost-of-living crisis has abated. That is an economic success that ought to be celebrated. But that now rates are falling again, we should at least acknowledge the costs that come with them. Some of the key stakeholders affected by the interest rate cut include: * Mortgage holders, who will see their monthly repayments decrease * Savers, who will earn less on their bank deposits * Retirees, who will see their returns on interest-bearing assets shrink * Prospective homebuyers, who will face higher house prices * Australians planning international holidays, who will find travel more expensive.

The Reserve Bank's decision to cut interest rates has significant implications for the housing market and the broader economy. While some Australians will benefit from lower borrowing costs, others will be left worse off. It's essential to consider the diverse effects of interest rate cuts and not assume they are universally beneficial. By understanding the various perspectives and potential consequences, we can better navigate the complexities of the economy and make informed decisions about our financial lives.