RBA governor indicates an historic rate cut could be on the cards in November

RBA governor indicates an historic rate cut could be on the cards in November

Mortgage interest rates could fall to an unprecedented low if the head of the nation’s central bank acts on his strongest suggestion yet that the cash rate will be cut.

The Reserve Bank of Australia has held the cash rate at 0.25 per cent since an emergency meeting in March, an historic low not seen in the last 30 years. 

But senior officials have been hinting at an atypical cut of 0.15 to take place at the next board meeting on 3 November, lowering the cash rate to an extraordinary new low of 0.10.

“When the pandemic was at its worst and there were severe restrictions on activity, we judged that there was little to be gained from further monetary easing,” began governor Philip Lowe, at Citi’s Annual Investment Conference in Sydney.

“The solutions to the problems the country faced lay elsewhere. 

“As the economy opens up, though, it is reasonable to expect that further monetary easing would get more traction than was the case earlier.”

The cash rate influences the interest charged on variable mortgages and savings accounts. It is a marker for the interest rates of unsecured loans held between banks.

Economists predicted the rate would be cut earlier this month, but they revised their forecasts after considering the move would coincide with the release of the federal budget.

A growing number forecast the rate cut will take place on 3 November.

“(There’s an) expectation that the (RBA) Board is set to cut the overnight cash rate from 0.25 per cent to 0.10 per cent,” Bill Evans said, chief economist at Westpac. 

“... Recently we have detected a change in attitude indicating more confidence that the plumbing of the financial system can operate effectively at an even lower set of policy rates. 

“With that in mind and the commitment towards full employment and the target for inflation there seems to be no reason for the Board to delay its decision.”

Mortgages and the big four

Commonwealth Bank, Westpac and NAB did not pass on the most recent rate cut to their variable home loan customers. Only new customers signing up to their fixed rate mortgages benefited.

ANZ was the only exception; it passed on a cut of 0.15 per cent to variable rate 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

But they have passed on cuts in the past. The big four passed an average cut of 0.86 per cent to existing customers since June 2019, but the cash rate had dropped by 1.25 per cent.

All eyes will be on the big four banks to see if they’ll pass any potential rate cuts to their customers, Sally Tindall said, research director of RateCity. 

“Lenders have been aggressively cutting variable rates over the last six months, but by and large these cuts have been reserved for new customers, or people willing to fix their rate,” she said.
 
“With JobKeeper and JobSeeker being wound back, a growing number of Australian households are facing financial stress. In a time when every dollar counts, a mortgage rate cut of 0.15 per cent would save the average homeowner $33 a month.”

Save money on mortgages, earn less on savings

The cash rate doesn’t only influence the interest generated on home loans. Banks also use it to guide the interest calculated on savings accounts.

And the interest calculated on these accounts have been tumbling in line with the falling cash rate. A RateCity analysis of savings accounts over the last two months found 67 banks cut the interest rate -- including CBA, NAB, Westpac, ANZ and Macquarie -- by an average of 0.17 per cent.

“Any rate cut is likely to be passed on to the millions of Australians who have money in the bank,” Ms Tindall said. 

“However with savings rates already hovering just above zero, many savers have already given up on the prospect of earning interest from their income.”

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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 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 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 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 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 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 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 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.

Is there a limit to how many times I can refinance?

There is no set limit to how many times you are allowed to refinance. Some surveyed RateCity users have refinanced up to three times.

However, if you refinance several times in short succession, it could affect your credit score. Lenders assess your credit score when you apply for new loans, so if you end up with bad credit, you may not be able to refinance if and when you really need to.

Before refinancing multiple times, consider getting a copy of your credit report and ensure your credit history is in good shape for future refinances.