What to expect if the RBA cuts the cash rate next week

What to expect if the RBA cuts the cash rate next week

The Reserve Bank of Australia is tipped to cut the cash rate next Tuesday for the third time this year. Aussies everywhere will no doubt be wondering how much their banks will pass on to them.

If the Reserve Bank of Australia (RBA) cuts the cash rate yet again on Tuesday, it will fall to a new historic low of 0.75 per cent.

And if the June and July cash rate cuts are anything to go by, mortgage holders will continue to come out on top, and savers may find themselves considering hiding their money under their mattress. 

Scary news for savers

Savings accounts have been hit hard since the two RBA cash rate cuts. Many Aussies rely on the interest earned on their savings. From budding first home buyers trying to save for a deposit, to retirees just trying to get by on their hard-earned nest egg.

In fact, RBA governor Philip Lowe reported receiving daily letters and emails from frustrated savers asking if he’d “forgotten about them” following the second cash rate cut.

RateCity research found that the big four banks dropped conditional savings account rates by an average of 47 basis points since March - pre-RBA cash rate cuts.

Conditional savers - big four banks

Bank

Max savings rate pre-cuts

(21 March)

Max savings rate post-cuts

(18 Sept)

Difference

CBA

1.65%

1.15%

0.50%

Westpac

2.30%

1.90%

0.40%

NAB

2.30%

1.86%

0.44%

ANZ

2.40%

1.85%

0.55%

Source: RateCity.com.au. Note: Based on a balance of $25k. Data accurate as at 25 September.

ANZ conditional savings accounts fell by 55 basis points from March to September. Only this week ANZ cut the base interest rate on its online saver to 0.10 per cent. Given that the cash rate fell 50 basis points this year, ANZ customers might be feeling the pinch right now.

What to expect:

There’s little incentive at the moment for banks to attract customers with high interest rates or promotions, such as cash back deals. If history is anything to go by, savers might need to brace themselves for banks passing on more cuts, if not the full 0.25 per cent, to their savings account interest.

However, it’s not all doom and gloom. Savers should consider hopping online and doing some research around which provider is offering the highest savings rates. Even if they’re lower than one would like, there’s no reason to be complacent. Switching to a more competitive savings account might be a way to stay on top of all the cuts – as long as you meet the new account conditions.

Conditional savers – market leaders

Company

Base rate

Max rate

Conditions

MyState Bank

0.80%

2.50%

Deposit of $20 in everyday acct, make 5 transactions each month

Up

0.50%

2.50%

5 card purchases from everyday acct

86 400

0.40%

2.50%

Deposit of $1000 in everyday acct

BoQ

0.35%

2.50%

Deposit of $1000 in everyday acct

UBank

1.35%

2.41%

Deposit of $200 in everyday acct

Source: RateCity.com.au. Note: Based on a balance of $25k. Data accurate as at 25 September.

Happy days for homeowners – if they take action

When they RBA cuts the cash rates, Aussies with home loans usually get relief if their lender passes on those cuts. But that’s a big if, as not every lender passed on the full 25 basis point cut in June and in July.

RateCity research found that the average rate cut passed on to homeowners following two cash rate cuts was 43 basis points.

What the big four banks passed onto variable rate home loan customers

Lender

June rate cut

July rate cut

Total rate cut

CBA

0.25%

0.19%

0.44%

Westpac

0.20%

0.20%

0.40%

NAB

0.25%

0.19%

0.44%

ANZ

0.18%

0.25%

0.43%

Note: the above rate cuts are for owner occupiers paying principal and interest. In July CBA gave a 0.25 per cent cut to customers paying interest-only, while Westpac handed down a 0.30 per cent for investors paying interest-only.

CBA and NAB variable rate home loan customers came out on top of the big four banks, with 0.44 per cent cut from their home loans. Westpac variable rate home loan customers fared worse, not receiving a full rate cut once in June or July. 

What to expect:

A full 0.25 per cent rate cut may not come from the big four banks if the RBA cuts the cash rate next Tuesday.

Given that saving rates are approaching zero, the pressure is on the banks to balance the wants and needs of mortgage borrowers and savers. On top of this are the needs of shareholders expecting the banks to make a profit. It will be difficult for all lenders to pass on another full rate cut without effecting shareholders. 

Chances are, the best way to get a full rate cut will be to give yourself one. 

Savings if you give yourself a 0.25% cut

Loan size

Old rate

New rate

Monthly difference

Annual difference

$300,000

3.91%

3.66%

$43

$512

$400,000

3.91%

3.66%

$57

$682

$500,000

3.91%

3.66%

$71

$853

$750,000

3.91%

3.66%

$107

$1,280

$1 million

3.91%

3.66%

$142

$1,706

Source: RateCity.com.au. Note: 3.91% is average home loan rate on RateCity database on 25 September. Assumes an owner occupier paying principal and interest over 30 years. 

Hop on to a comparison table and look what lower rates are offered by other lenders. You’ll also want to see what lower rates your own bank is offering new customers. Call up your lender and ask them to match these lower rates.

If they’re not prepared to give you a rate cut, you may want to consider refinancing to one of the lower rate loan options you’ve already found. There are many lenders offering home loan rates starting with a 2, so it doesn’t hurt to look. 

How to talk your way to a lower interest rate:

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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.

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 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.

How to use the ME Bank reverse mortgage calculator?

You can access the equity in your home to help you fund your needs during your senior years. A ME Bank reverse mortgage allows you to tap into the equity you’ve built up in your home while you continue living in your house. You can also use the funds to pay for your move to a retirement home and repay the loan when you sell the property.

Generally, if you’re 60 years old, you can borrow up to 15 per cent of the property value. If you are older than 75 years, the amount you can access increases to up to 30 per cent. You can use a reverse mortgage calculator to know how much you can borrow.

To take out a ME Bank reverse mortgage, you’ll need to provide information like your age, type of property – house or an apartment, postcode, and the estimated market value of the property. The loan to value ratio (LVR) is calculated based on your age and the property’s value.

When do mortgage payments start after settlement?

Generally speaking, your first mortgage payment falls due one month after the settlement date. However, this may vary based on your mortgage terms. You can check the exact date by contacting your lender.

Usually your settlement agent will meet the seller’s representatives to exchange documents at an agreed place and time. The balance purchase price is paid to the seller. The lender will register a mortgage against your title and give you the funds to purchase the new home.

Once the settlement process is complete, the lender allows you to draw down the loan. The loan amount is debited from your loan account. As soon as the settlement paperwork is sorted, you can collect the keys to your new home and work your way through the moving-in checklist.

What are the features of home loans for expats from Westpac?

If you’re an Australian citizen living and working abroad, you can borrow to buy a property in Australia. With a Westpac non-resident home loan, you can borrow up to 80 per cent of the property value to purchase a property whilst living overseas. The minimum loan amount for these loans is $25,000, with a maximum loan term of 30 years.

The interest rates and other fees for Westpac non-resident home loans are the same as regular home loans offered to borrowers living in Australia. You’ll have to submit proof of income, six-month bank statements, an employment letter, and your last two payslips. You may also be required to submit a copy of your passport and visa that shows you’re allowed to live and work abroad.

Cash or mortgage – which is more suitable to buy an investment property?

Deciding whether to buy an investment property with cash or a mortgage is a matter or personal choice and will often depend on your financial situation. Using cash may seem logical if you have the money in reserve and it can allow you to later use the equity in your home. However, there may be other factors to think about, such as whether there are other debts to pay down and whether it will tie up all of your spare cash. Again, it’s a personal choice and may be worth seeking personal advice.

A mortgage is a popular option for people who don’t have enough cash in the bank to pay for an investment property. Sometimes when you take out a mortgage you can offset your loan interest against the rental income you may earn. The rental income can also help to pay down the loan.

When does Commonwealth Bank charge an early exit fee?

When you take out a fixed interest home loan with the Commonwealth Bank, you’re able to lock the interest for a particular period. If the rates change during this period, your repayments remain unchanged. If you break the loan during the fixed interest period, you’ll have to pay the Commonwealth Bank home loan early exit fee and an administrative fee.

The Early Repayment Adjustment (ERA) and Administrative fees are applicable in the following instances:

  • If you switch your loan from fixed interest to variable rate
  • When you apply for a top-up home loan
  • If you repay over and above the annual threshold limit, which is $10,000 per year during the fixed interest period
  • When you prepay the entire outstanding loan balance before the end of the fixed interest duration.

The fee calculation depends on the interest rates, the amount you’ve repaid and the loan size. You can contact the lender to understand more about what you may have to pay. 

Does the Home Loan Rate Promise apply to discounted interest rate offers, such as honeymoon rates?

No. Temporary discounts to home loan interest rates will expire after a limited time, so they aren’t valid for comparing home loans as part of the Home Loan Rate Promise.

However, if your home loan has been discounted from the lender’s standard rate on a permanent basis, you can check if we can find an even lower rate that could apply to you.

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.

What is the Home Loan Rate Promise?

The Home Loan Rate Promise is RateCity putting its money where its mouth is. We believe that too many Australians are paying too much for their home loans. We’re so confident we can help Aussies save money, if we can’t beat your current rate, we’ll give you a $100 gift card.*

There are two reasons it pays to check your rate with the Home Loan Rate Promise:

  • You can find out how much you could save on your home loan by switching to a loan with a lower interest rate
  • If we can’t beat your current rate, you can claim a $100 gift card with our Home Loan Rate Promise*

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 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.