Yahoo Finance RBA rate cut warning: Why mortgage holders could be short-changed by the banks
The banks have come under fire for not passing on interest rate benefits to Australians, but they've also been guilty of withholding when the Reserve Bank cuts rates.
Mortgage holders are desperately hoping the Reserve Bank (RBA) will - as is widely expected - cut interest rates at some point this year but, even if it does, one expert is warning there might not be too much to celebrate.
All of the Big Four banks’ economic teams believe interest rates have peaked for this hiking cycle. They are now pencilling in at least one rate cut in the second half of the year, with CBA forecasting as many as three cuts.
But, even if these cash rate cuts eventuate, RateCity research director Sally Tindall said there was no guarantee the banks would follow suit.
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“While cuts will almost certainly come at some stage, borrowers cannot automatically assume that, when the RBA does pull the downward lever on rates, this relief will be passed on in full to them, especially if there are a series of rapid cuts,” Tindall told Yahoo Finance.
“Your bank does not have to move with the cash rate, and history has shown that they don’t always pass on the cuts in full.”
RateCity’s analysis found none of the major banks passed on all of the RBA’s cash rate cuts in full when they happened in 2019 and 2020.
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For example, for the first of the RBA’s 2019 interest rate cuts - 0.25 per cent - only CBA and NAB passed on the cut in full to existing variable-rate customers. Westpac cut rates by 0.20 per cent, while ANZ cut rates by just 0.18 per cent.
The central bank cut the cash rate by 1.40 per cent in total between June 2019 and March 2020. CBA cut rates by a total of 0.82 per cent over that period, Westpac 0.80 per cent, NAB 0.84 per cent and ANZ 0.97 per cent.
None of the Big Four passed on the RBA’s final 0.15 per cent cut in November 2020, according to the analysis shared with Yahoo Finance.
What savings could borrowers miss out on?
A full 0.25 per cent interest rate cut would save a borrower who had a $500,000 home loan at the start of the hikes about $74 per month on their repayments. This is based on the borrower being someone who hasn’t renegotiated their home loan since the rate hikes began.
But, if the bank only passed on a 0.20 per cent interest rate cut, this borrower would only save $59 per month on their repayments. If they passed on 0.15 per cent, the saving would reduce to just $44 per month - a difference of $30 per month.
Tindall urged mortgage holders to not “bank” on interest rate cuts happening in 2024 and to prepare for the worst-case scenario.
“While we can hope for the best, it’s important to have a plan for the worst,” she said. “Make sure your budget can take at least one more hike and, if you’re feeling stretched, take the opportunity now to reach out and ask for help.”
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