Will the RBA rate cut make your mortgage cheaper?
After months of speculation, the RBA has finally decided to cut the cash rate, placing it at a record low 1.25%. Of course, the question on everyone’s mind now is, “will this make my mortgage cheaper?”
The answer depends on how much of the cut flows through to customers. If lenders pass on the 0.25% cut in full, mortgage holders can look forward to some handsome reductions to their monthly repayments.
Unfortunately, popular sentiment seems to suggest that banks are unlikely to pass on the full cut to borrowers, and will instead opt to keep most of the savings for themselves.
“Their profits are under pressure due to factors such as increased compliance costs following the royal commission and lower mortgage volumes, so I expect they will use this as an opportunity to improve their interest margins,” said Mozo Director Kirsty Lamont.
Last time the RBA cut official interest rates (way back in August 2016), the Big 4 banks only passed on about half of the cut to owner occupiers, allowing them to pocket $3.6 billion in additional revenue.
And by delaying the date at which the cuts took effect, they were able to keep an extra $7.1 million per day, or $113 million in total.
Whatever the case, a cut of any size means smaller monthly repayments. Here’s just how much you stand to save on an average home loan*.
| Cut | New rate | New repayment | Monthly savings | Yearly savings |
|---|---|---|---|---|
| 0.05% | 4.26% | $1,970 | $12 | $144 |
| 0.10% | 4.21% | $1,958 | $24 | $288 |
| 0.15% | 4.16% | $1,947 | $35 | $420 |
| 0.20% | 4.11% | $1,935 | $47 | $564 |
| 0.25% | 4.06% | $1,924 | $58 | $696 |
*Based on a $400,000 home loan over 30 years at 4.31% average variable interest rate and LVR of 80%.
Existing borrowers could miss out
If you’re with a non-bank lender, you’re not guaranteed to get good news. Sometimes non-bank lenders don't pass on the cut to their existing customers.
It’s more so banks and mutuals that are likely to pass on the cut to all of their customers. That said, some of the more innovative lenders, like Athena Home Loans, even offer rate match features, promising existing customers that they’ll always get the same rates as new ones.
So if you've got an existing mortgage, keep an eye on our naughty or nice table to see what your lender decides to do. And make sure you get in touch with them if they cut and you don't see the benefits.
Is it a good time to get a home loan?
“If you can satisfy the banks’ new lending criteria now is a great time to be in the market for a home loan,” Lamont said.
Lower interest rates mean first home buyers are in a much better position to get a foot on the property ladder, making them one of the main beneficiaries of the rate cut.
But if you were thinking of locking in a fixed rate loan, you might want to reconsider. According to Mozo Data Manager Peter Marshall, fixed rates are not going to look so good in the near future.
“If you've locked in something at 3.80% for a couple of years, variable rates could be well below that in a few months’ time. It would seem to be a pretty bad idea to fix right now, so I'd suggest waiting,” he said.
So if news of lower rates has you thinking about taking out a home loan, or if your bank isn’t sharing the savings and it’s time to switch, make sure you check out what hot deals are around with our home loans comparison page.
* WARNING: This comparison rate applies only to the example or examples given. Different amounts and terms will result in different comparison rates. Costs such as redraw fees or early repayment fees, and cost savings such as fee waivers, are not included in the comparison rate but may influence the cost of the loan. The comparison rate displayed is for a secured loan with monthly principal and interest repayments for $150,000 over 25 years.
** Initial monthly repayment figures are estimates only, based on the advertised rate. You can change the loan amount and term in the input boxes at the top of this table. Rates, fees and charges and therefore the total cost of the loan may vary depending on your loan amount, loan term, and credit history. Actual repayments will depend on your individual circumstances and interest rate changes.
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