1% rate cut next year: What would that mean for mortgage holders?
The Reserve Bank of Australia today left the cash rate on hold at 4.10%. With big bank economists predicting that rate cuts are on the horizon, what could this mean for your home loan?
The cash rate has been held yet again this month, meeting the expectations of three of the four big bank economists. CommBank, Westpac and ANZ economists suggested that this cycle of tightening officially peaked in June at a 4.10% cash rate, with rate cuts predicted for 2024.
Big four bank’s cash rate forecasts
- CBA: Peak of 4.10% in June 2023, then dropping to 3.10% by end of 2024
- Westpac: Peak of 4.10% in June 2023, then dropping to 2.60% by end of 2025
- NAB: Peak of 4.35% by November 2023, then dropping to 3.10% by early 2025
- ANZ: Peak of 4.10% in June 2023, then dropping to 3.85% by December 2024
As you can see, many of the big banks have forecast that we could be seeing cuts to the cash rate throughout 2024 - 2025. CBA in particular has tipped a whopping one percentage point cut could occur by the end of 2024.
The impact of a 1% cut to the cash rate
So, what would a 1% cut to the cash rate mean for your mortgage repayments?
Fixed rate borrowers
Fixed rate home loans lock in an interest rate for a fixed period, so if the cash rate were to fall, you would not be affected until this period ended. However, when your fixed rate period comes to an end, it’s worth using an RBA rate cut as leverage to negotiate a lower rate with your lender on your loan. Alternatively, it may be a worthwhile time to compare your options to see if there are more competitive loans available for refinance.
Variable rate borrowers
If you have a variable rate home loan, you’ll likely find that the financial pressures that have been building over the last year ease. Your lender generally will pass on the decrease to your interest rate, meaning your mortgage repayments may fall.
However, not every bank or lender may pass these rate cuts on to variable rate customers. While most lenders generally do pass on rate cuts in full, some may instead partially cut rates (such as by 0.15% when the cash rate is cut by 0.25%), or cut new customer or fixed rates instead.
Some lenders may also decrease their interest rates in the lead up to the RBA cash rate announcement. The lender may cite this reason as why they do not pass on the cash rate cut in full or at all.
In fact, in the lead up to November 2020, when the last cut to the cash rate dropped it to 0.10%, 35 lenders slashed their mortgage rates preemptively, with 29 cutting variable rates and 20 reducing fixed rates. Shockingly, RateCity analysis from this time showed that while the RBA had cut the cash rate by 1.25% between June 2019 to November 2020, the banks passed only 0.86% on average to existing customers.
How much could cuts to the cash rate save you?
RateCity research shows that on a $500,000, 25-year home loan, a 1% cut to the average owner-occupier variable rate of 6.24% could save you over $300 in monthly repayments.
Difference of 1%: $500,000 home loan
Repayments over 1 year
Mortgage at 6.24%
Mortgage at 5.24%
Source: RateCity Repayment Calculator. Note: Hypothetical example based on $500,000 25-year home loan with RBA average owner-occupier variable rate for existing customers at 6.24% (June 2023) compared to same loan but with 5.24% interest rate. Does not factor in fees.
Give yourself a rate cut today: negotiate or refinance your mortgage
As mentioned above, banks and lenders don't always pass on interest rate cuts, so there is no guarantee that a hypothetical 1% rate cut could find its way to your household budget. This is why it may be worthwhile considering negotiating your mortgage rate or even refinancing if appropriate.
Firstly, consider reaching out to your current lender and asking for a lower rate. It can be worth hopping online and looking at what the lender is offering new customers as it is usually lower than existing customer rates, then asking them to match this. Use our handy RateCity guide and script to haggle your way to a lower rate.
If your current lender remains firm on their rates, it may be worthwhile considering switching to a more competitive lender. Sometimes one of the most effective ways to secure a better rate is by becoming a new customer. Use comparison tools, such as tables and calculators, to filter down and compare new home loan options.
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Product database updated 05 Mar, 2024
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