What should you do with the rate cut?

What should you do with the rate cut?

It’s the rate relief news many Australians have been waiting for, as the Reserve Bank of Australia (RBA) cut interest rates by 50 basis points on Tuesday. But it will count for little if the banks fail to pass the cut on, and now millions of Australians are waiting to see what they will do.

Financial commentators believe it’s unlikely that all lenders will pass on all the savings.

Damian Smith, chief executive of RateCity, said the signals from the big four banks suggest that they will try to hold on to part of the rate cut.

“Of the 50 basis point cash rate reduction from the RBA since November, the big four banks have only passed on around 40 basis points to variable rate home loan customers,” he said.

Business analyst Peter Switzer said there is no obligation for the banks to reduce rates in line with the RBA’s move.

“It’s going to be in the hands of the banks, how much they pass on. We’d love to see them pass the whole lot on, but I reckon we’ll see something like a 35 basis points,” he said.

John Symonds, founder of Aussie Home Loans agreed: “I think the reality is the banks will probably keep 10 basis points, maybe eight to 10, which would leave 40 basis points to go to much needed household savings”.

If the banks do pass on at least some of the rate cuts, about 2.5 million Australian households with variable mortgages will find that their repayments are automatically lower by the end of the month. The big decision is what to do with any extra cash this change generates.

For homeowners with a $300,000 home loan, for instance, and paying a rate of 6.64 percent before the RBA decision their monthly repayments would have been about $1924 (based on a loan term of 30 years). If a lender passes on the full 0.50 percent reduction, those borrowers would now be paying 6.14 percent, and monthly repayments would go down to $1826, a saving of $98 per month.

But by keeping repayments at the previous level of $1924, the extra $98 goes straight into reducing the loan principal, and so the amount of interest being charged goes down. The effect of this would be to reduce interest payments over the life of the loan by more than $54,500 and shave almost 4 years from the life of the loan itself. To see how much you could save on your home loan by maintaining higher repayments, try using RateCity’s mortgage calculator.

It may seem surprising that a relatively small amount of money – literally, just over $3 per day – can have such a big impact, according to Smith.

“But because you are reducing the principal of the loan faster, you reduce the “base” of which interest is charged. Extra repayments are like a fuel additive or your engine – they can absolutely increase your speed,” he said.

Some homeowners will need the extra money to deal with other costs in their life, so reducing repayments is understandable, Smith added.

“But if the big issue for you is that you can’t afford to keep repayments at the previous level because you were already struggling with cash flow, then the answer is to refinance into a lower-rate loan.”

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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.

What is a fixed home loan?

A fixed rate home loan is a loan where the interest rate is set for a certain amount of time, usually between one and 15 years. The advantage of a fixed rate is that you know exactly how much your repayments will be for the duration of the fixed term. There are some disadvantages to fixing that you need to be aware of. Some products won’t let you make extra repayments, or offer tools such as an offset account to help you reduce your interest, while others will charge a significant break fee if you decide to terminate the loan before the fixed period finishes.

Mortgage Calculator, Repayment Type

Will you pay off the amount you borrowed + interest or just the interest for a period?

What is a building in course of erection loan?

Also known as a construction home loan, a building in course of erection (BICOE) loan loan allows you to draw down funds as a building project advances in order to pay the builders. This option is available on selected variable rate loans.

Mortgage Calculator, Repayment Frequency

How often you wish to pay back your lender. 

What is breach of contract?

A failure to follow all or part of a contract or breaking the conditions of a contract without any legal excuse. A breach of contract can be material, minor, actual or anticipatory, depending on the severity of the breaches and their material impact.

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

How often is your data updated?

We work closely with lenders to get updates as quick as possible, with updates made the same day wherever possible.

Does each product always have the same rating?

No, the rating you see depends on a number of factors and can change as you tell us more about your loan profile and preferences. The reasons you may see a different rating:

  • Lenders have made changes. Our ratings show the relative competitiveness of all the products listed at a given time. As the listing change, so do the ratings.
  • You have updated you profile. If you increase your loan amount, the impact of different rates and fees will change which loans are the lowest cost for you.
  • You adjust your preferences. The more you search for flexible loan features, the more importance we assign to the Flexibility Score. You can also adjust your Flexibility Weighting yourself, which will recalculate the ratings with preference given to more flexible loans.

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.

What is a valuation and valuation fee?

A valuation is an assessment of what your home is worth, calculated by a professional valuer. A valuation report is typically required whenever a property is bought, sold or refinanced. The valuation fee is paid to cover the cost of preparing a valuation report.

How is the flexibility score calculated?

Points are awarded for different features. More important features get more points. The points are then added up and indexed into a score from 0 to 5.

Does Real Time Ratings' work for people who already have a home loan?

Yes. If you already have a mortgage you can use Real Time RatingsTM to compare your loan against the rest of the market. And if your rate changes, you can come back and check whether your loan is still competitive. If it isn’t, you’ll get the ammunition you need to negotiate a rate cut with your lender, or the resources to help you switch to a better lender.

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