Why an RBA rate cut could mean around $2,000 back in your wallet

Why an RBA rate cut could mean around $2,000 back in your wallet

It’s been almost three years since Australians saw a change in the Reserve Bank of Australia cash rate, but next month’s decision is looking likely to bring mortgage-holders some relief in the form of a rate cut.

Reserve Bank of Australia (RBA) governor Philip Lowe said recently the board “will consider the case for lower interest rates” at their next meeting on monetary policy.

In the last few years we’ve seen lenders move interest rates out-of-cycle, often increasing rates and putting greater pressure on Aussie families.

However, if the next rate decision is a cut, this could mean nearly $2,000 back into mortgage-holders’ pockets in one year alone.

RateCity crunched the numbers on the average owner-occupier and investor principal and interest rates on our database, and how much Aussies can expect to save in one month and one year if the full 25 basis point cut is passed on by their lender.

Potential average owner-occupier variable loan savings if RBA cuts rates

Loan size

Previous monthly repayments
(average rate of 4.31%)

New monthly repayments
(rate cut to 4.06%)

Savings per month

Savings over 1 year

$300,000

$1,507

$1,464

$44

$525

$400,000

$2,003

$1,944

$58

$700

$500,000

$2,498

$2,425

$73

$875

$750,000

$3,737

$3,628

$109

$1,312

$1,000,000

$4,976

$4,830

$146

$1,749

Source: RateCity.com.au database, ASIC MoneySmart Mortgage switching calculator. 

Notes: Rates based on average owner-occupier, variable, principal and interest rate on 30-year loan. Includes ongoing annual fee of $251.

Potential average investor variable loan savings if RBA cuts rates

Loan size

Previous monthly repayments
(average rate of 4.72%)

New monthly repayments
(rate cut to 4.47%)

Savings per month

Savings over 1 year

$300,000

$1,580

$1,536

$45

$538

$400,000

$2,100

$2,041

$60

$717

$500,000

$2,620

$2,545

$75

$896

$750,000

$3,920

$3,808

$112

$1,344

$1,000,000

$5,219

$5,070

$149

$1,792

Source: RateCity.com.au database, ASIC MoneySmart Mortgage switching calculator.

Notes: Rates based on average investor, variable, principal and interest rate on 30-year loan. Includes ongoing annual fee of $251.

What if my bank doesn’t pass on the rate cut? 

If you’re on a variable rate loan and the RBA cuts interest rates, but yours still stays the same, it might be worth considering giving yourself a rate cut.

You can do this in two ways. Firstly, go online and check what your bank is offering new customers. Then call up your lender and ask to speak to their customer retention specialist (as it’s their job to keep you happy) and ask them to match this lower new customer rate.

Secondly, look around at what other low rates other lenders are offering customers, and suggest that you’ll leave if they can’t discount your rate.

Thirdly, be prepared to move to one of those lower rate lenders. You’re well within your right to take your business elsewhere if your bank refuses to budge – especially after an RBA cash rate.

Just make sure you do your research around refinancing and any fees and additional costs associated before making the switch. If your projected savings look like they’ll outweigh the initial cost, this can be a competitive option if you’re unhappy with your current lender.

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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.

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 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.

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.

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 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 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.

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 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.

Will I be paying two mortgages at once when I refinance?

No, given the way the loan and title transfer works, you will not have to pay two mortgages at the one time. You will make your last monthly repayment on loan number one and then the following month you will start paying off loan number two.

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.