After the reserve bank slashed interest rates to a new record low, the key question for people with mortgages and potential borrowers is: will banks pass the cut on to home loan customers?
So far there has been no direct passing on of the interest rate cut by the major banks to borrowers.
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Several smaller lenders passed the full 0.15 percent interest rate cut, or a larger 0.2 percent cut in some cases, shortly after the RBA’s decision yesterday, but the big banks have held back.
Today Commonwealth Bank, NAB and Westpac announced changes to their mortgage rates, but only for some customers.
Banks lower the interest rates on fixed home loans, which charge borrowers a set interest rate for a set period of time.
Owner-occupiers taking out a new four-year fixed-term home loan will receive the biggest cut, down to just 1.99 percent for CBA and Westpac and 1.98 percent for NAB.
However, the interest rates on variable home loans from banks will remain unchanged. At the time of writing, ANZ had not announced any changes.
The decision to pass the rate cut on to fixed, non-variable home loan customers follows an existing trend.
In March, the reserve bank cut its key rate target by 50 basis points, or 0.5 percent, lowering financing costs for banks, which in turn passed some of that cut on to customers.
“A little more than half of the banks’ financing costs, which have fallen since March, were used for variable interest rates on home loans,” said Marion Kohler, head of the RBA’s domestic markets, in a speech in September.
However, the fixed interest rates have fallen more sharply.
“The interest rates on new fixed-rate loans have fallen by around 65 basis points since February this year. This is almost double the decrease for new floating rate loans. “
RBA data shows that the difference between the interest rates on fixed and floating loans is the highest in more than a decade.
As a result, the proportion of borrowers taking out fixed home loans has risen sharply, including those who have refinanced their existing mortgages at lower interest rates.
“Fixed-rate home loans now make up around a quarter of outstanding home loans,” said Kohler.
Once you’ve set your home loan, you are locked into that rate for a set period of time, so fixed rate cuts are more likely to affect new borrowers than existing borrowers.
AMP Capital’s senior economist Diana Mousina said the decision to cut fixed rates allows banks to get loans to pass on the RBA cut, but that will affect fewer loans.
“It enables them to show that they are still cutting some of their rates in line with the RBA, but not the floating rate that would affect the majority of borrowers who already have a mortgage with them,” Ms. Mousina said.
She said banks had little leeway to cut the interest they pay on savings accounts in order to fund a lowering of the floating rate on home loans.
“Because deposit rates are so close to zero, they can’t really cut the deposit rate any further,” she said.
However, the banks’ funding costs were lowered, and the RBA also lowered the interest rate on the term finance facility, which means banks can borrow from the RBA for three years at an interest rate of 0.1 percent.
On Tuesday, Reserve Bank Governor Philip Lowe said he “expected and hoped” that the rate cut would be passed on to all borrowers.
However, he acknowledged that lately this hasn’t always taken the form of banks cutting their standard floating rates.
Instead, it is carried over to the home loan market by borrowers who renegotiate or switch to another bank with a lower interest rate.
Financial advisor Claire MacKay said borrowers should try reaching out to their current lender for a better deal.
“It’s a lot easier to speak to your existing advisor to get a better rate than going through the entire approval process with a new institution,” said Ms. MacKay.
She said the interest rate borrowers would ultimately be offered would also depend on their financial situation, including personal loans, credit cards, and buy it now to pay accounts later.
AMP Capital’s Diana Mousina isn’t surprised that the number of fixed home loans has increased.
Fixing a loan carries the risk that further rate cuts will be missed during the fixed term.
However, with the spot rate near zero and the big banks already refraining from passing rate cuts on to variable home loan borrowers, more people may be tempted to correct this.
However, the RBA has announced that it will not raise its key rate for at least three years and stands ready to take further easing measures if necessary so that no upward pressure on floating rates is expected in the near future.
A 40 percent drop in Australian property prices is an “extreme but plausible” scenario, according to the RBA.
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Claire MacKay said the decision to repair all or part of a home loan was due to a tradeoff between security and flexibility.
Contra accounts, commonly associated with variable home loans, allow borrowers to reduce the interest paid on a loan while leaving cash available for re-draw. This can also influence the decision as to whether they are fixed, partially fixed or variable.
Ms. MacKay said borrowers should also look for additional fees in exchange for “bells and whistles” when a mortgage loan might be more suitable.
“The devil is always in the details, they post their headline rate, but then it comes down to what other features you actually need,” said Ms. McKay.
“If you want to switch after a few years, what are the costs, what are the breaks, what are the monthly fees, what are the commissions that are paid to your broker?”
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