August update: Reserve Bank cuts the cash rate to 2.5%
Australia’s leading financial comparison website RateCity (www.ratecity.com.au) has welcomed the Reserve Bank’s decision to lower the official cash rate at its August board meeting today. But borrowers are being urged to shop around to find far bigger rate cuts than those expected to be passed on after today’s announcement.
The official cash rate has hit a new record low of 2.50 percent after the second rate cut of the 2013 calendar year.
If passed on in full, a 0.25 percentage point rate cut represents a repayment reprieve of $44 per month to a variable rate home loan customer with a typical mortgage of $300,000 and paying the average interest rate of 5.64 percent (before any rate cuts are applied).
Alex Parsons, CEO of RateCity, said there were much bigger savings to be had by comparing home loans and refinancing into a better deal.
“While we would expect lenders to pass this cut on in full, we know this has not always historically been the case. The main thing for borrowers to remember is that they really don’t need to wait for an RBA rate cut. Far bigger cuts are available by comparing and switching to a better deal.”
“There’s a lot of lazy money out there. Refinancing from the average rate into one of the lowest variable rates on the market would mean savings of over $150 every month, or over $200 per month if today’s cut is passed on to customers,” he said.
RateCity research has also shown that greater competition at the pointy end of the mortgage market has driven the best available rates further down than in the past.
Parsons said the gap between the lowest and highest variable interest rate had grown to 2.01 percentage points – or the equivalent of over eight, 0.25 percentage point rate cuts – with rates ranging from 4.74 percent to 6.75 percent. This compares with 12 months ago when the rate spread was 1.78 percentage points, and two years ago when rates ranged by 1.71 percentage points.
The most significant gap between the best and worst mortgage rates was for 5-year fixed terms, which differ by as much as 2.10 percentage points. Home loan rates fixed for 1-year range by as much as 2 percentage points, RateCity calculations show.
“A difference of 2 percentage points may not sound significant, but for a borrower with a $300,000 home loan repaid over 25 years, this gap represents a difference of $349 in monthly repayments and more than $4100 in the first year.”
“What this means for borrowers is bigger savings for those who seek out competitive rates and more money wasted for those who don’t.”
The Greater Building Society this week cut its 1 year fixed rate home loan to 3.99 percent, breaking the 4 percent mark.