The RBA’s cut interest rates, but that doesn’t mean your home loan will automatically get cheaper
After the Reserve Bank cut interest rates to a new record low, the key question for people with mortgages and would-be borrowers is — will the banks pass the cut on to home loan customers?
So far, there hasn’t been a straight pass-through of the interest rate cut to borrowers by the big banks.
Several smaller lenders passed on the full 0.15 per cent rate cut shortly after the RBA’s decision yesterday, or in some cases a larger cut of 0.2 per cent, but the major banks held off.
Today ANZ, the Commonwealth Bank, NAB and Westpac announced changes to their home loan rates, but only to some customers.
The banks cut the rates on fixed home loans, which charge borrowers a set interest rate for a pre-determined period of time.
Owner-occupiers who take out a home loan with a four-year fixed term will get the biggest rate cut, down to below 2 per cent in some cases.
But the rates on variable home loans at the banks remain unchanged.
Fixed rates fall more than variable rates this year
The decision to pass on the rate cut to fixed, not variable, home loan customers follows an existing trend.
In March, the Reserve Bank cut its cash rate target by 50 basis points, or 0.5 per cent, reducing the funding costs for banks, which in turn passed some of that reduction on to customers.
“A little over half of the reduction in banks’ funding costs since March has been passed through to variable housing lending rates,” the RBA’s head of domestic markets Marion Kohler said in a speech in September.
However, there’s been a steeper decline in fixed rates.
“Interest rates on new fixed-rate loans have declined by around 65 basis points since February this year. This is almost double the decline for new variable-rate loans.”
RBA data shows the difference between rates on fixed and variable loans is the highest it’s been in more than a decade.
And as a result, there’s been a sharp rise in the proportion of borrowers taking out fixed home loans, including people who have refinanced their existing mortgages at lower rates.
“Fixed-rate housing loans now account for around one-quarter of housing credit outstanding,” Ms Kohler said.
Banks get ‘credit’ without passing on cut to most borrowers
Once you’ve fixed your home loan, you’re locked into that interest rate for a set period, so cuts of fixed rates affect new rather than existing borrowers.
AMP Capital senior economist Diana Mousina said the decision to cut fixed rates allows the banks to get credit for passing on the RBA’s cut, but it will affect fewer loans.
“It allows them to show that they’re still reducing some of their interest rates in line with the RBA, but not the variable rate, which would affect the majority of borrowers who already have a mortgage with them,” Ms Mousina said.
She said banks have little scope to reduce the interest they are paying on savings accounts, in order to fund a cut to variable home loan rates.
“With the deposit rates so close to zero, they can’t really cut the deposit rate much further,” she said.
However, the banks’ funding costs have been reduced, with the RBA also cutting the rate of the Term Funding Facility, which means banks can borrow from the RBA at a rate of 0.1 per cent for three years.
On Tuesday, Reserve Bank governor Philip Lowe said he “expected and hoped” the rate cut would get passed through to all borrowers.
But he acknowledged that, recently, this hasn’t always taken the form of banks cutting their standard variable rates.
Instead, it’s flowed through to the home loan market by borrowers renegotiating or switching to a different bank with a lower interest rate.
Financial advisor Claire MacKay said borrowers should try approaching their current lender to get a better deal.
“It’s a lot easier to talk to your existing advisor to get a better rate than to have to go through the whole approval process with a new institution,” Ms MacKay said.
She said the rate borrowers would ultimately be offered would also depend on their financial situation, including personal loans, credit cards and buy-now, pay later accounts.
To fix or not to fix
AMP Capital’s Diana Mousina isn’t surprised there has been an increase in fixed home loans.
Fixing a loan does pose a risk of missing out on any further rate cuts being passed through during the fixed term.
But with the cash rate close to zero and the major banks already steering away from passing rate cuts on to variable home loan borrowers, more people may be tempted to fix.
However, the RBA has said it doesn’t expect to increase the cash rate for at least three years and it is prepared to take further easing action if necessary, so there’s unlikely to be any upward pressure on variable rates any time soon.
Claire MacKay said the decision to fix all or part of a home loan comes down to a trade-off between certainty and flexibility.
Offset accounts, commonly linked to variable home loans, allow borrowers to reduce the interest paid on a loan while leaving cash available to be redrawn, so may also influence the decision about whether to go fixed, partially-fixed or variable.
Ms MacKay said borrowers should also look out for extra fees, in exchange for “bells and whistles”, when a basic loan may be more suitable.
“The devil is always in the detail, they advertise their headline rate but then it’s a matter of what other functionality do you actually need,” Ms McKay said.
“If after a few years you want to change, what’s the cost going to be, what are the break costs, what are the monthly fees, what are commissions being paid to your broker?”