Rewards won’t be as rich for mortgage holders with future RBA rate cuts
On Tuesday the Reserve Bank Board made the decision to cut the official cash rate by 25 basis points to 1.00% - a new record low and the first time we’ve witnessed back-to-back cuts since 2012.
For months I’ve held firm in the belief that the Board was likely to cut interest rates at least twice in 2019. And now that that’s come to fruition thanks to a host of factors including below target levels of inflation, a weakening Australian economy and an unemployment rate which remains above 4.50%, the point at which the RBA hopes there would be upward pressure on wages.
And if current conditions remain the same, I now fully expect the RBA to pull the lever again for a third cut before the year is out.
While the latest cut, and any further cuts, won’t be welcome news for Australian savers who rely on interest from deposit accounts, mortgage holders have had much more reason to smile.
That’s because many lenders passed on the full, or a sizeable portion of, the June rate cut. By Mozo’s count 47 home loan lenders passed on the full 25 basis point rate cut while 32 passed on part of the cut.
We’ve already seen a handful of lenders make adjustments to their variable rate home loan offerings since Tuesday’s RBA decision, and with another potential rate cut to come before the end of 2019, mortgage holders should be anticipating even further drops in their monthly repayments, no?
Well, that might not be the case.
Even before Tuesday’s cut we were sitting pretty close to the point where lenders will resist cutting mortgage rates much further.
That’s because the banks’ net interest margins - the figure between the rate they charge on home loans and give out for deposit accounts - is nearly at a point which can’t go much lower.
In many cases at call deposit account rates are already pretty close to zero, with the major banks all hovering around the 0.30% mark.
So yes, banks could shave 10 basis points off their deposit rates to pass on a 10 basis point mortgage rate cut. But there’s not an awful lot of room to move after that before they begin to eat into the net interest margin.
Of course, banks do have a mixed funding base whereby they can borrow from overseas and raise money from other facilities, but they still get a fairly large portion of homeland funding from local deposit customers.
That means that they need to balance their interests and maintain at least some level of competition with their deposit account rates in order to attract deposits.
Looking at the rest of the market outside of the big four banks, I still think that we might have around 50 basis points left to drop when it comes to mortgage rates, but I don’t see how it can go lower than that.
The bottom of the mortgage market could be around 2.75% for some of the online lenders - a figure that we’re not too far away from at present.
Let’s not forget that this is an historically cheap time to borrow money and pay back a mortgage in Australia. Certainly a far cry from interest rates in the high teens that many who were around in the 1990’s will never forget.
So while mortgage holders are unlikely to continue to see a drop in their mortgage rates in line with any future RBA rate drops, it’s certainly a prime time to be paying down as much of their debt as they can.