Rate cut set for this Thursday: what this means for your mortgage

The RBA could potentially cut the cash rate as early as this Thursday, as the economic impact of the coronavirus pandemic continues to amplify.

RateCity.com.au analysis shows the average mortgage holder with a $400,000 loan could see their minimum monthly mortgage repayments reduce by up to $55 a month if there is a 0.25 per cent cut and their lender passes it on in full.

If the RBA goes one step further and drops the cash rate by 0.50 per cent, their minimum monthly repayments will decrease by $110.

Potential impact of a 0.25% cut on minimum monthly repayments

Potential impact of a 0.50% cut on minimum monthly repayments

Notes: based on someone paying principal and interest over 30 years. The current rate is based on the estimated RateCity.com.au average rate.

However, many customers are putting this money back into their mortgage, either by request or because their bank’s default position is to keep customers’ mortgage repayments the same.

What banks do with customers’ monthly repayments after a variable rate cut (default position)

• CBA, NAB and ANZ: Do not automatically lower their variable rate customers’ monthly repayments, unless customers request otherwise.
• Westpac: Adjusts variable rate customers’ monthly repayments once a year, unless requested otherwise or there is a rate hike. However, Westpac is changing to automatic monthly adjustments from now on.
• Other lenders: Many smaller lenders automatically lower their variable customers’ monthly repayments when rates are cut including St George, ING, HSBC, Bank of Melbourne, BankSA and Macquarie Bank, unless customers request otherwise.

The most recent cutting cycle stretches back to 2011. Over this time the cash rate has fallen from 4.75 per cent in October 2011 to 0.50 per cent today in 16 cuts, including one double cut.

Mortgage holders who have kept their monthly repayments the same during this time are likely to be thousands of dollars ahead on their home loan.

RateCity.com.au research director Sally Tindall said: “Many Australians are already ahead on their mortgage because their bank has kept their monthly repayments the same when interest rates were cut.

“This is money some people can potentially access through their redraw, should they find themselves in a tight financial position,” she said.

“If interest rates are cut again, some mortgage holders may want to re-think what they do with the savings.

“In most cases, variable rate customers should be able to choose whether they pay the minimum or extra.

“Think about what’s best for your finances and, if needed, get some independent financial advice to put yourself in the best possible position in these unprecedented times,” she said.

Pros of keeping monthly repayments the same

• Get ahead on your mortgage repayments and build a buffer.
• Reduce interest charges by having a lower balance outstanding.
• Potentially pay your home loan off sooner.

Pros of lowering monthly repayments to the minimum

• Access to extra money to help pay bills and other debts (particularly debts with higher interest rates).
• Access to extra money to spend in the economy.
• Flexibility: you can still choose to have the money in an offset account (if you have one) to help reduce your interest.

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