RBA cuts cash rate to 0.10%, extraordinary new low not seen in 30 years

RBA cuts cash rate to 0.10%, extraordinary new low not seen in 30 years

The nation’s central bank has made it possible for lenders to lower interest charges on mortgages by cutting the cash rate to an extraordinary new low, but it’s unclear if banks will pass the savings on.

The Reserve Bank of Australia (RBA) reduced the cash rate by 15 basis points to 0.10 per cent today, a move intended to free up money for households who would otherwise be spending it on mortgage interest charges.

“With Australia facing a period of high unemployment, the Reserve Bank is committed to doing what it can to support the creation of jobs,” Philip Lowe said, Governor of the RBA.

“Encouragingly, the recent economic data have been a bit better than expected and the near-term outlook is better than it was three months ago.

“Even so, the recovery is still expected to be bumpy and drawn out and the outlook remains dependent on successful containment of the virus.”

The RBA cash rate is a guardpost financial institutions use to set interest rates on both their mortgage and savings products. It typically moves in quarter-of-a-per cent increments, but the RBA had already lowered it to 0.25 per cent in March -- at the time, a record low.

The atypical cut by 0.15 per cent offers families struggling financially during the COVID-19 pandemic some relief, without completely eradicating banking interest margins.

What does this mean for mortgage holders

How much money mortgage payers can expect to save depends on two things.

The first is whether the bank they’re with passes the savings on by reducing their interest rates. The second concerns the balance owing on their loan.

For instance, on a $500,000 mortgage with interest at 3.19 per cent being repaid over 30 years, the rate cut would lead to a monthly saving of $41. This works out to be an annual saving of $489.

  0.15 cut  
Loan size Monthly savings Annual savings

$400,000

$33 $391

$500,000

$41 $489

$750,000

$61 $734

$1,000,000

$82 $979

Source: RateCity

The cut could give families struggling a little more breathing room, while those coping well financially would simply pocket the savings.

  • Curious how much you may save if your lender passes on 15 basis points cut? Use a mortgage calculator now to project your repayment savings.

Will banks pass it on this time?

Banks don’t always pass on mortgage rate cuts. When the RBA cut the cash rate to 0.25 per cent in March, only ANZ bank passed it on to existing variable rate customers.

The RBA has cut the cash rate by 1.25 per cent since June 2019, but according to a RateCity analysis, the banks have passed only 0.86 per cent on average to existing customers.

Date CBA Westpac NAB ANZ RBA
Jun-19

0.25%

0.20%

0.25%

0.18%

0.25%

Jul-19

0.19%

0.20%

0.19%

0.25%

0.25%

Oct-19

0.13%

0.15%

0.15%

0.14%

0.25%

3-Mar-20

0.25%

0.25%

0.25%

0.25%

0.25%

19-Mar-20

0%

0%

0%

0.15%

0.25%

Total cut

0.82%

0.80%

0.84%

0.97%

1.25%

Between the extraordinary rate cut initiated by the RBA and most big banks choosing not to pass the last one on, there’s pressure on them to cut mortgage interest rates and pass the savings on, Sally Tindall said, research director at RateCity.

“Governor Lowe believes a rate cut now will help reduce the number of problem loans, but this will only work if the banks pass it on,” she said.

“Record-low rates have been a shot in the arm for the tens of thousands of mortgage holders who have been able to refinance their loan during COVID.”

The lower interest rates have led to a surge in refinancing. About 165,000 loans were refinanced in the six months to September, according to the Australian Bureau of Statistics (ABS).

But many customers struggling aren’t in a position to refinance. About 937,000 people have lost their job since the beginning of the year, according to ABS October figures. Meanwhile, it is estimated hundreds-of-thousands of people have deferred their mortgage repayments.

For these people who are struggling, refinancing with a different bank may not be an option.

These are the people who would benefit from a cut to their interest rates the most, Ms Tindall said.

“Many people who have had to defer their mortgage or switch to interest-only repayments aren’t being offered the best rates from their lender,” she said.

“Banks should do the right thing by these customers by passing any RBA cut on to them as quickly as possible.”

Interest on savings accounts has been dropping

There is a downside to having the cash rate reach never before seen lows. Banks don’t just look to it to set mortgage interest rates -- they also use it to guide interest rates on savings accounts.

This means the money sitting in a savings account is going to earn less.

And banks have been slashing interest rates on their savings accounts. Of the 101 banks in the RateCity database, 50 have lowered the earning potential on their savings accounts by cutting interest rates last month.

 

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Fact Checked -

This article was reviewed by Personal Finance Editor Alex Ritchie before it was published as part of RateCity's Fact Check process.

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Learn more about home loans

Why does Westpac charge an early termination fee for home loans?

The Westpac home loan early termination fee or break cost is applicable if you have a fixed rate home loan and repay part of or the whole outstanding amount before the fixed period ends. If you’re switching between products before the fixed period ends, you’ll pay a switching break cost and an administrative fee. 

The Westpac home loan early termination fee may not apply if you repay an amount below the prepayment threshold. The prepayment threshold is the amount Westpac allows you to repay during the fixed period outside your regular repayments.

Westpac charges this fee because when you take out a home loan, the bank borrows the funds with wholesale rates available to banks and lenders. Westpac will then work out your interest rate based on you making regular repayments for a fixed period. If you repay before this period ends, the lender may incur a loss if there is any change in the wholesale rate of interest.

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.

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. 

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.

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 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 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.

How much are repayments on a $250K mortgage?

The exact repayment amount for a $250,000 mortgage will be determined by several factors including your deposit size, interest rate and the type of loan. It is best to use a mortgage calculator to determine your actual repayment size.

For example, the monthly repayments on a $250,000 loan with a 5 per cent interest rate over 30 years will be $1342. For a loan of $300,000 on the same rate and loan term, the monthly repayments will be $1610 and for a $500,000 loan, the monthly repayments will be $2684.

How long should I have my mortgage for?

The standard length of a mortgage is between 25-30 years however they can be as long as 40 years and as few as one. There is a benefit to having a shorter mortgage as the faster you pay off the amount you owe, the less you’ll pay your bank in interest.

Of course, shorter mortgages will require higher monthly payments so plug the numbers into a mortgage calculator to find out how many years you can potentially shave off your budget.

For example monthly repayments on a $500,000 over 25 years with an interest rate of 5% are $2923. On the same loan with the same interest rate over 30 years repayments would be $2684 a month. At first blush, the 30 year mortgage sounds great with significantly lower monthly repayments but remember, stretching your loan out by an extra five years will see you hand over $89,396 in interest repayments to your bank.

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.

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.

How much deposit will I need to buy a house?

A deposit of 20 per cent or more is ideal as it’s typically the amount a lender sees as ‘safe’. Being a safe borrower is a good position to be in as you’ll have a range of lenders to pick from, with some likely to offer up a lower interest rate as a reward. Additionally, a deposit of over 20 per cent usually eliminates the need for lender’s mortgage insurance (LMI) which can add thousands to the cost of buying your home.

While you can get a loan with as little as 5 per cent deposit, it’s definitely not the most advisable way to enter the home loan market. Banks view people with low deposits as ‘high risk’ and often charge higher interest rates as a precaution. The smaller your deposit, the more you’ll also have to pay in LMI as it works on a sliding scale dependent on your deposit size.

What is an interest-only loan? How do I work out interest-only loan repayments?

An ‘interest-only’ loan is a loan where the borrower is only required to pay back the interest on the loan. Typically, banks will only let lenders do this for a fixed period of time – often five years – however some lenders will be happy to extend this.

Interest-only loans are popular with investors who aren’t keen on putting a lot of capital into their investment property. It is also a handy feature for people who need to reduce their mortgage repayments for a short period of time while they are travelling overseas, or taking time off to look after a new family member, for example.

While moving on to interest-only will make your monthly repayments cheaper, ultimately, you will end up paying your bank thousands of dollars extra in interest to make up for the time where you weren’t paying off the principal.

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.