Not everyone is cheering about interest rate cuts

Newton’s Third Law of Interest Rates: “For every cheer, someone sheds a tear.”

I know, there’s no such thing. Sir Isaac was no economist (the dismal science). He was a physicist (something that deals in relative certainty).

But you could convert all three of his laws of motion into equally accurate money rules. Most notably that pesky third law about actions having equivalent reactions.

There comes a point where we homeowners, or mortgage payers, have to stop celebrating “good” news on interest rates and be a little sympathetic.

Sure, for homeowners, last week’s 0.25 percentage point cut by the Reserve Bank to 3 per cent was something to smile about. Doesn’t need to be a Lleyton Hewitt “COME ON!” fist-pump, but quietly raise a toast to RBA governor Glenn Stevens.

In reality, the cut won’t quite come through in time to allow homeowners to have more money in their pockets to ring through the retailer’s tills prior to Christmas.

However, if that’s your aim, you can buy an extra accessory for Barbie or Ben 10 knowing there will be a little extra dosh in January to help pay the credit card bills when they fall due.

I look forward to more of that crud in our household like I look forward to putting on four kilos. But I know both are inevitably coming at Christmas.

Interest rate cuts are not one-sided joy. “For every action, there is an equal but opposite reaction,” said Sir Isaac.

There will be plenty who will be shedding a tear about the Reserve Bank cutting official interest rates back to their equal lowest in decades. And that’s anyone with savings.

While home buyers have just seen their $350,000 monthly mortgage repayment drop by $39 a month, their parents or grandparents have just seen the income on their savings drop by a similar amount.

And what about those poor kids saving for their first home?  Put back that ambition a little longer, dudes and dudettes. Unless, of course, house prices continue to stay relatively low, following the gentle falls since late 2010.

That is, interest rate movements divide the generations.

Those between, roughly, 30 and 55 with mortgages are the winners from rate cuts. Those on either side of Generation X – the young and the old – will be bleeding after the equivalent of seven interest rate cuts in just over a year.

Savers lose from interest rate cuts. While the banks are still figuring out exactly who will win and who will lose, and by how much, there are people, despite your personal gain from lower mortgage repayments, that you should be feeling sorry for.

Retirees are, generally, living off their savings. Let’s be cynical and say that the banks cut the full 0.25 per cent from interest paid on deposits.

For a retiree fortunate enough to have $250,000 in the bank … they’ve just lost $625 of income a year. Roughly, $52 a month. That can be a lot to a retiree or pensioner.

Since early November last year, the interest rate cuts have cut about $365 a month from their income.

A quarter of a million might sound like a lot, but if the already low interest rates were seeing them struggle to live off the earnings, they’ll now be digging into their capital.

Hey, take the greedy angle. If you want to turn that into something of self-interest as a Gen Xer, then the Golden Oldies will now be further “spending your inheritance”.

Don’t believe the palaver about savers v borrowers? The CBA said last week, after it only handed over 0.2 percentage points of the RBA’s rate cut, that it was balancing the needs of its 1.8 million home loan customers against its 11 million depositors.

In pure numbers, the CBA is saying far more people will be negatively affected by the rate cut as will benefit. In all likelihood, the winners will, on average, benefit more than the losers, as pumping money into punters’ pockets is what the RBA is trying to do.

But it’s an interesting statistic that anyone with a mortgage should consider before getting too publicly excited about their lower cost of housing.

You’re outnumbered six to one.

Invoke the right karma this Christmas and do the right thing. Buy Grandma a bottle of sherry. A decent one.

Bruce Brammall is the author of Debt Man Walking (www.debtman.com.au), a licensed financial adviser and mortgage broker. bruce@debtman.com.au.