What happens if the RBA cuts rates today: can I get them immediately?

What happens if the RBA cuts rates today: can I get them immediately?

On the first Tuesday of every month, with the exception of January, the Reserve Bank of Australia (RBA) holds a Board meeting to decide whether the cash rate will increase, decrease or remain unchanged.

The cash rate is the official interest rate that banks charge other banks to borrow money. If the RBA decreases the cash rate, the interest rate banks are charged when they borrow from other banks will be reduced.

If banks are able to save money from reduced interest rates, they will often pass on some or all of these savings to consumers, though they are not required to.

So, with speculation that November’s meeting may result in a rate cut, you might be wondering what that could mean for you.

What does an RBA cash rate cut mean for mortgage holders?

Mortgage holders with a variable interest rate home loan could see their interest rate reduced in response to a cash rate cut.

Once the RBA has announced a reduction to the cash rate, lenders will make a decision as to whether they intend to pass this on to their customers.

Some banks and lenders may pass on the full cut, while others might hold some of the cut back.

There is also potential for lenders to pass on the rate cut only to new customers. That’s why it can be beneficial to track home loan interest rate movements in order to find out which lenders are offering the most competitive rates.

In the instance that your mortgage provider has made the decision not to pass on the rate cut to existing customers, you might consider refinancing your home loan to take advantage of more competitive offers from other lenders.

How quickly do lenders pass on rate cuts to borrowers?

In the past, some lenders have announced rate reductions as quickly as within minutes of the RBA’s decision being released, while others have taken up to a week to publicise their movements.

But regardless of the speed at which lenders release this information, rate reductions can take upwards of several weeks to come into effect.

How much could I save if my lender passes on the rate cut?

The average mortgage holder could save $56 a month if their bank passes on a 0.25 per cent rate cut on in full.

However, as a partial cash rate cut of just 0.15 per cent is predicted this time around, customers might only save $34. Meanwhile, a 0.10 per cent cut would result in savings of just $23, based on a $400,000 mortgage paying principal and interest.

Impact of a 0.25% rate cut

 Loan Amount Monthly Difference  Annual Difference 
$400,000 -$56 -$675
$500,000 -$70 -$843
$750,000 -$105 -$1,265

Impact of a 0.15% rate cut

Loan Amount  Monthly Difference  Annual Difference 
$400,000  -$34  -$406 
$500,000  -$42  -$508 
$750,000  -$63  -$761

Impact of a 0.10% rate cut

 Loan Amount Monthly Difference  Annual Difference 
$400,000 -$23  -$271 
$500,000  -$28  -$339 
$750,000  -$42  -$508

Source: RateCity.com.au. Calculations do not factor in fees.

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What happens to my home loan when interest rates rise?

If you are on a variable rate home loan, every so often your rate will be subject to increases and decreases. Rate changes are determined by your lender, not the Reserve Bank of Australia, however often when the RBA changes the cash rate, a number of banks will follow suit, at least to some extent. You can use RateCity cash rate to check how the latest interest rate change affected your mortgage interest rate.

When your rate rises, you will be required to pay your bank more each month in mortgage repayments. Similarly, if your interest rate is cut, then your monthly repayments will decrease. Your lender will notify you of what your new repayments will be, although you can do the calculations yourself, and compare other home loan rates using our mortgage calculator.

There is no way of conclusively predicting when interest rates will go up or down on home loans so if you prefer a more stable approach consider opting for a fixed rate loan.

How much of the RBA rate cut do lenders pass on to borrowers?

When the Reserve Bank of Australia cuts its official cash rate, there is no guarantee lenders will then pass that cut on to lenders by way of lower interest rates. 

Sometimes lenders pass on the cut in full, sometimes they partially pass on the cut, sometimes they don’t at all. When they don’t, they often defend the decision by saying they need to balance the needs of their shareholders with the needs of their borrowers. 

As the attached graph shows, more recent cuts have seen less lenders passing on the full RBA interest rate cut; the average lender was more likely to pass on about two-thirds of the 25 basis points cut to its borrowers.  image002

What is a comparison rate?

The comparison rate is a more inclusive way of comparing home loans that factors in not only on the interest rate but also the majority of upfront and ongoing charges that add to the total cost of a home loan.

The rate is calculated using an industry-wide formula based on a $150,000 loan over a 25-year period and includes things like revert rates after an introductory or fixed rate period, application fees and monthly account keeping fees.

In Australia, all lenders are required by law to publish the comparison rate alongside their advertised rate so people can compare products easily.

What is a variable home loan?

A variable rate home loan is one where the interest rate can and will change over the course of your loan. The rate is determined by your lender, not the Reserve Bank of Australia, so while the cash rate might go down, your bank may decide not to follow suit, although they do broadly follow market conditions. One of the upsides of variable rates is that they are typically more flexible than their fixed rate counterparts which means that a lot of these products will let you make extra repayments and offer features such as offset accounts.

What is a honeymoon rate and honeymoon period?

Also known as the ‘introductory rate’ or ‘bait rate’, a honeymoon rate is a special low interest rate applied to loans for an initial period to attract more borrowers. The honeymoon period when this lower rate applies usually varies from six months to one year. The rate can be fixed, capped or variable for the first 12 months of the loan. At the end of the term, the loan reverts to the standard variable rate.

What does going guarantor' mean?

Going guarantor means a person offers up the equity in their home as security for your loan. This is a serious commitment which can have major repercussions if the person is not able to make their repayments and defaults on their loan. In this scenario, the bank will legally be able to the guarantor until the debt is settled.

Not everyone can be a guarantor. Lenders will generally only allow immediate family members to act as a guarantor but this can sometimes be stretched to include extended family depending on the circumstances.

What is an ombudsman?

An complaints officer – previously referred to as an ombudsman -looks at formal complaints from customers about their credit providers, and helps to find a fair and independent solution to these problems.

These services are handled by the Australian Financial Complaints Authority, a non-profit government organisation that addresses and resolves financial disputes between customers and financial service providers.

Why should you trust Real Time Ratings?

Real Time Ratings™ was conceived by a team of data experts who have been analysing trends and behaviour in the home loan market for more than a decade. It was designed purely to meet the evolving needs of home loan customers who wish to merge low cost with flexible features quickly. We believe it fills a glaring gap in the market by frequently re-rating loan products based on the changes lenders make daily.

Real Time Ratings™ is a new idea and will change over time to match the frequently-evolving demands of the market. Some things won’t change though – it will always rate all relevent products in our database and will not be influenced by advertising.

If you have any feedback about Real Time Ratings™, please get in touch.

Mortgage Calculator, Loan Purpose

This is what you will use the loan for – i.e. investment. 

How much are repayments on a $250K mortgage?

The exact repayment amount for a $250,000 mortgage will be determined by several factors including your deposit size, interest rate and the type of loan. It is best to use a mortgage calculator to determine your actual repayment size.

For example, the monthly repayments on a $250,000 loan with a 5 per cent interest rate over 30 years will be $1342. For a loan of $300,000 on the same rate and loan term, the monthly repayments will be $1610 and for a $500,000 loan, the monthly repayments will be $2684.

Mortgage Calculator, Repayments

The money you pay back to your lender at regular intervals. 

How personalised is my rating?

Real Time Ratings produces instant scores for loan products and updates them based what you tell us about what you’re looking for in a loan. In that sense, we believe the ratings are as close as you get to personalised; the more you tell us, the more we customise to ratings to your needs. Some borrowers value flexibility, while others want the lowest cost loan. Your preferences will be reflected in the rating. 

We also take a shorter term, more realistic view of how long borrowers hold onto their loan, which gives you a better idea about the true borrowing costs. We take your loan details and calculate how much each of the relevent loans would cost you on average each month over the next five years. We assess the overall flexibility of each loan and give you an easy indication of which ones are likely to adjust to your needs over time. 

Mortgage Calculator, Loan Results

These are the loans that may be suitable, based on your pre-selected criteria. 

Who offers 40 year mortgages?

Home loans spanning 40 years are offered by select lenders, though the loan period is much longer than a standard 30-year home loan. You're more likely to find a maximum of 35 years, such as is the case with Teacher’s Mutual Bank

Currently, 40 year home loan lenders in Australia include AlphaBeta Money, BCU, G&C Mutual Bank, Pepper, and Sydney Mutual Bank.

Even though these lengthier loans 35 to 40 year loans do exist on the market, they are not overwhelmingly popular, as the extra interest you pay compared to a 30-year loan can be over $100,000 or more.