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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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.

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.

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 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.

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 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.

What is the best interest rate for a mortgage?

The fastest way to find out what the lowest interest rates on the market are is to use a comparison website.

While a low interest rate is highly preferable, it is not the only factor that will determine whether a particular loan is right for you.

Loans with low interest rates can often include hidden catches, such as high fees or a period of low rates which jumps up after the introductory period has ended.

To work out the best value for money, have a look at a loan’s comparison rate and read the fine print to get across all the fees and charges that you could be theoretically charged over the life of the loan.

Does Australia have no cost refinancing?

No Cost Refinancing is an option available in the US where the lender or broker covers your switching costs, such as appraisal fees and settlement costs. Unfortunately, no cost refinancing isn’t available in Australia.

Can I change jobs while I am applying for a home loan?

Whether you’re a new borrower or you’re refinancing your home loan, many lenders require you to be in a permanent job with the same employer for at least 6 months before applying for a home loan. Different lenders have different requirements. 

If your work situation changes for any reason while you’re applying for a mortgage, this could reduce your chances of successfully completing the process. Contacting the lender as soon as you know your employment situation is changing may allow you to work something out. 

Can I get a home loan if I am on an employment contract?

Some lenders will allow you to apply for a mortgage if you are a contractor or freelancer. However, many lenders prefer you to be in a permanent, ongoing role, because a more stable income means you’re more likely to keep up with your repayments.

If you’re a contractor, freelancer, or are otherwise self-employed, it may still be possible to apply for a low-doc home loan, as these mortgages require less specific proof of income.

Will I have to pay lenders' mortgage insurance twice if I refinance?

If your deposit was less than 20 per cent of your property’s value when you took out your original loan, you may have paid lenders’ mortgage insurance (LMI) to cover the lender against the risk that you may default on your repayments. 

If you refinance to a new home loan, but still don’t have enough deposit and/or equity to provide 20 per cent security, you’ll need to pay for the lender’s LMI a second time. This could potentially add thousands or tens of thousands of dollars in upfront costs to your mortgage, so it’s important to consider whether the financial benefits of refinancing may be worth these costs.