Even if they didn’t back a winning horse in the race that stops a nation, Australian homeowners still scored a victory on Melbourne Cup Day, with news that the Reserve Bank dropped the official cash interest rate by 0.25 percent, to 4.50 percent.
Before the cut, the rate had been on hold at 4.75 percent since Melbourne Cup Day 2010, when the RBA dampened spirits with a 25 basis point increase. But it had been more than two and a half years since the RBA last dropped interest rates, back in April 2009.
According to RateCity CEO Damian Smith, the reduction in rates is welcome news for homeowners with variable rate mortgages, and he has urged Australia’s lenders to pass on the rate cut in full.
Indeed, Westpac was the first of the major banks to deliver the 0.25 percent rate cut to its customers, closely followed by the Commonwealth Bank and later ANZ. NAB has since announced it will reduce some of its variable rates by 20 basis points. At the time of writing, other lenders to serve up interest rate reductions included the Bank of Queensland, the Bank of Melbourne, Bankwest, ING Direct and ME Bank.
If your lender cuts rates
For homeowners, an interest rate reduction means potential repayment savings of around $46 per month, or $550 per year, on the average 25-year mortgage of $288,300.
However, despite the temptation to pocket this unexpected windfall, Smith says borrowers should use the rate reprieve as an opportunity to get ahead on their mortgage. RateCity’s calculations show that homeowners who maintain their current level of repayments ($2058 per month on a $288,300 home loan) could save more than $21,000 in interest over the life of their loan.
For a better idea of how interest rate cuts will affect you and your mortgage, you can head to RateCity’s mortgage calculator.
If your lender doesn’t cut rates
Interestingly, the National Australia Bank did not follow the other major banks by delivering a full rate cut, instead passing on only a 0.20 percent reduction. This works out at a saving of $37 per month for NAB customers, which is still significant, with the bank justifying its decision on the basis that it has the lowest mortgage rates among the major banks. Even so, Smith says customers of lenders who don’t pass on the full interest rate reduction should consider shopping around for a better deal because by switching to a cheaper lender you could potentially save thousands of dollars.