Not all banks may pass on rate cuts

by Andrew Willink
27 August 2008

When the Reserve Bank of Australia meet next month, many experts are suggesting we could see the first rate cut announcement in a very long time. NAB have already officially confirmed that they will be passing on a rate cut of 0.25% if it happens, but the other banks have been relatively silent up until this point, and are weighing their options.

The cost of funding may be improving, but whether there is enough margin to allow for the full 25 basis point rate cut to be passed on is another matter altogether. Banks are out to make a profit and their shareholders are happiest when massive profits are announced. Now that NAB have made their intentions next month clear, other banks and credit unions may follow suit, though none have committed to anything just yet.

What to do with the rate cut
For consumers who are with other banks, you may be wondering what can be done if your bank were to elect not to pass on the full 25 basis point interest rate cut. The first option would be to speak with your bank and find out if they are able to negotiate at all on your home loan interest rate. Depending on the size of your loan and the margins involved with your bank this may or may not be possible.

If that fails, you could follow Treasurer Wayne Swan’s persistent advice and consider switching banks. That in itself is not an easy process though, as it involves complex calculations around exit fees and loan repayments. If you’re considering switching, you need to work out whether you’ll be financially better off in the long term. Without a crystal ball, that task may prove difficult from the outset, but if you’re paying a higher rate than the majority it could be well worth investigating.

The savings benefits
Based on the current average interest rate of 9.6% and a 250K mortgage over 25 years, a 0.25% rate cut would shave $45 a month off the minimum repayment, decreasing it from $2,120 a month to $2,075 a month. A 0.5% rate cut would save you around twice that amount at $90 a month, decreasing your monthly repayments from $2,120 to $2,030. Over the life of the loan, those savings add up to approximately $13,500 and $27,000 respectively. While no one knows for sure when or if all the banks will pass on the full rate cut, if it eventuates, it is reasonable to expect other banks to announce their intentions in the coming weeks.