Whether the RBA cuts official interest rates today – and how much of any cut is passed on by Australia’s mortgage lenders – will make a big difference to many Australian SMEs, with new research showing 28% use their home loan to finance their business in some way.
The data, released by SME software firm MYOB following a survey of over 1,000 SMEs, shows how tightly linked mortgage rates and business finance really are.
Just under 15% of SMEs utilise a line of credit through their home loan to help fund their business, 5% have funded their business by increasing the value of their home loan and 5% funded their business by redrawing against equity in their mortgage.
A further 4% have used cash sitting in their mortgage offset account to pump into their business.
MYOB chief Tim Reed says the fact that the big banks did not pass on the RBA’s full 50-basis-point cut to mortgage holders hit many SME owners with a double whammy – their housing finance and their business finance didn’t decrease as much as it should have.
“For many business owners, even those without commercial finance, an interest rate move doesn’t just affect their ability to repay the family home loan. For too many, home loan interest rate moves also affect their ability to keep their livelihood on an even keel,” Reed says.
“It would make a real emotional and financial difference to the public if the Reserve Bank dropped the cash rate again now and lenders followed suit with both home loan and business loan interest rates.”
While the RBA is unlikely to spend much time dwelling on the emotional state of Australian business owners, its board members face a very tough decision on whether to cut rates again in June and how big a cut is needed.
“The Reserve Bank has a rock solid case to cut interest rates,” CommSec economist Craig James says.
“The latest data shows that the economy is barely growing while inflation is solidly under control. The only question now is whether the Reserve Bank cuts by 25 or 50 basis points.”
And it’s a question that is very difficult to answer. A 25-basis-point cut appears to be the consensus, but whether the RBA goes to 50-basis-point revolves around whether the bank feels the situation in Europe could still get worse.
If a collapse in Europe is still to come, then the RBA might decide it’s better off keeping that extra 25 basis points for further down the track – although we may not need to wait much longer for further cuts.
Westpac’s chief economist Bill Evans is tipping the cash rate will drop by a full 1% to 2.75% before the end of the year, with mortgage rates tipped to drop to between 6-6.5%.
Although that would indicate the economy has continued to slow, it would also give many SMEs comfort.