Who will pass the first out-of-cycle interest rate cut?

Many home loan holders will be disappointed by the RBA's decision to keep interest rates on hold at 3 percent. But besides the decision meaning that the RBA regard the economy to be in fairly good shape, mortgage holders are likely to receive good news from an alternative source.

It no longer seems a matter of 'if' out-of-cycle rate cuts will occur but 'when'. And economists surveyed by News Limited believe that the banks will be eager to cease the 'first mover' status, meaning a cut of even just 5 basis points by a major lender is likely to occur soon.

Major lenders have blamed the high costs of global funding for their inability to pass on full rate cuts since November 2011. While the legitimacy of these claims has been questioned, a UBS Investment Research report shows that the banks are in such a 'purple patch' that if they do not make self initiated rate cuts soon, they will likely face government intervention.

A recent report by news.com.au, showed that on a new average loan of $300,000, a lender can make as much as $80,000 profit. The large profits of the major lenders  and the lack of an even playing field to stimulate competition has become a growing concern for many in the industry. The Australian Finance Group (AFG) mortgage index shows that loans for first home buyers, underwritten by a non-major lender, have fallen from 24.8 percent in January to 21.8 percent in February, significantly down since a high of 33 percent in May last year. 'First home buyers' was traditionally the most competitive area for non-major lenders against the big banks, according to BrokerNews.com.au 

While now it seems out-of-cycle cuts are a sure bet, home loan owners will have to wait and see if the Big Four pass on the remaining 0.39 percent average that they have withheld between them, since the rate cutting cycle began. In the meantime, first home buyers and investors alike would benefit from a home loan comparison to find the markets best interest rates, keeping their money in their own pockets rather than passing it on as big bank profit.

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