Is my bank or lender required to pass on rate cuts?

Is my bank or lender required to pass on rate cuts?

After weeks of speculation about a potential rate cut, the Reserve Bank of Australia (RBA) has officially lowered the cash rate to 0.10 per cent.

The cash rate is the official interest rate at which lenders are charged to borrow from other lenders. The biggest of these lenders would be the RBA.

The RBA Board meets on the first Tuesday of every month, except January, to set the cash rate, which can be increased, decreased or maintained at the same level. Any cash rate movements can and generally do influence the interest rates that are available to you as a consumer.

This is why many people expect their lender to shave rates when the RBA reduces the cash rate.

But the reality is that lenders are not obliged to pass on a rate cut. When considering whether to change its interest rates, a lender may take into account the market’s overall performance, the lender’s own business performance and what competitors are doing.

It’s up to the banks to maintain the best interests of deposit-holders (or savers) and mortgage holders (borrowers) to manage the banks’ revenues, as well as profits for shareholders, if the lender is a public company.

This is because lower interest rates generally benefit borrowers but reduce the interest savers receive. Under higher interest rates, savers are typically better off, but borrowers need to pay more in interest costs.

Will my interest rate be reduced if lenders aren’t required to pass on rate cuts?

Just because lenders don’t have to pass on rate cuts, doesn’t mean they don’t.

Many lenders generally do pass on rate cuts, at least in part, to attract and retain customers in a competitive market.

Some lenders may even trim their rates in the lead-up to a widely predicted rate cut. In the past month before the rate cut, 35 lenders slashed their mortgage rates, with 29 cutting variable rates and 20 reducing fixed rates.

  • Fixed rate borrowers – If you have a fixed rate loan, you’re not likely to be too affected by any rate changes. You generally won’t need to worry too much about paying more or less interest due to a rate change as your interest rate is locked in for a set period. However, if your fixed rate period is coming to an end, it’s worth using an RBA rate cut as leverage to negotiate a lower rate with your lender on your loan.
  • Variable rate borrowers – If you have a variable rate loan and the cash rate is hiked, you may need to prepare for higher monthly repayments. If the cash rate is lowered, you could consider either negotiating with your lender for a better rate or refinancing to another lender.

What if my bank doesn’t pass on the rate cut?

If your lender doesn’t automatically pass on the rate cut, there are a few options for you.

Firstly, you could try jumping on the phone and negotiating with your lender. There’s a chance they may cave and offer you a rate cut, if you’re eligible, to keep your business.

If they won’t budge on their rates, then you may consider switching to another lender if you’re either close to the end of your fixed rate period or on a variable rate loan. One of the best ways to secure a better rate is to become a new customer.

Many lenders reserve their best interest rate deals for new customers as an incentive for them to join the lender. New customers typically include new mortgage borrowers and existing mortgage holders refinancing from another lender.

Alternatively, you might want to ask for other incentives aside from a rate cut. Some lenders are also offering lenders’ mortgage insurance (LMI) discounts and cashbacks as a way to lure new borrowers on board.

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Learn more about home loans

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 the difference between a fixed rate and variable rate?

A variable rate can fluctuate over the life of a loan as determined by your lender. While the rate is broadly reflective of market conditions, including the Reserve Bank’s cash rate, it is by no means the sole determining factor in your bank’s decision-making process.

A fixed rate is one which is set for a period of time, regardless of market fluctuations. Fixed rates can be as short as one year or as long as 15 years however after this time it will revert to a variable rate, unless you negotiate with your bank to enter into another fixed term agreement

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 however fixed rates do offer customers a level of security by knowing exactly how much they need to set aside each month.

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 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 is the difference between fixed, variable and split rates?

Fixed rate

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.

Variable rate

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.

Split rates home loans

A split loan lets you fix a portion of your loan, and leave the remainder on a variable rate so you get a bet each way on fixed and variable rates. A split loan is a good option for someone who wants the peace of mind that regular repayments can provide but still wants to retain some of the additional features variable loans typically provide such as an offset account. Of course, with most things in life, split loans are still a trade-off. If the variable rate goes down, for example, the lower interest rates will only apply to the section that you didn’t fix.

What is a standard variable rate (SVR)?

The standard variable rate (SVR) is the interest rate a lender applies to their standard home loan. It is a variable interest rate which is normally used as a benchmark from which they price their other variable rate home loan products.

A standard variable rate home loan typically includes most, if not all the features the lender has on offer, such as an offset account, but it often comes with a higher interest rate attached than their most ‘basic’ product on offer (usually referred to as their basic variable rate mortgage).

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 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 the average annual percentage rate?

Also known as the comparison rate, or sometimes the ‘true rate’ of a loan, the average annual percentage rate (AAPR) is used to indicate the overall cost of a loan after considering all the fees, charges and other factors, such as introductory offers and honeymoon rates.

The AAPR is calculated based on a standardised loan amount and loan term, and doesn’t include any extra non-standard charges.

Mortgage Calculator, Interest Rate

The percentage of the loan amount you will be charged by your lender to borrow. 

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.

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.

Mortgage Calculator, Loan Term

How long you wish to take to pay off your 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.