Forget the year of the rat; it’s been the year of the rate.
Twice in March and again in November, the Reserve Bank cut interest rates to ward off a COVID economy.
Meanwhile, lenders all over the country allowed borrowers to pause repayments.
Of course, that didn’t pause their interest… it simply accrued and the average Aussie will ultimately pay a load more on their loans.
You may be thinking: At least for now the rate cuts have minimised that extra cost.
But the thing is that banks didn’t necessarily pass on those rate cuts. And where they did, it was to varying degrees.
The Big 4 bank that looked after borrowers
So the cash rate is now at a fresh historic low of 0.10 percent. It was 2 percent five years ago.
If you think that difference sounds marginal, it was 20 times more. That also represents more than seven 25 basis point rate cuts.
Now there used to be a fairly direct relationship between official rate movements and lenders’ ones. However, the global credit crack-up put paid to that.as institutions hoarded and hiked virtually at whim, putting shareholders’ interests above mortgage holders’.
While banks are theoretically meant to pass on the cash-rate savings to mortgage customers, some have been more generous than others over the years… as exclusive data for Yahoo Finance attests.
Interest-rate comparison site Finder collated the interest rates of the Big 4 in December 2015 and December 2020, to identify the difference between the old and current rate. This was then analysed for the annual saving on a $500,000 mortgage.
And the most benevolent of the Big 4 banks?
NAB. The country’s third-largest bank, and one that has for years been aggressively chasing mortgage business, passed on the equivalent on a package loan of $7669 a year. This is the dollar difference of its five-year-apart rates.
Of the full 1.9 percentage point cash rate reduction, Commonwealth Bank passed on only 1.05 points, Westpac just a little more at 1.10 points and ANZ, 1.17.
However, not only did NAB deliver the full rate cut, it bestowed more… according to these numbers. It handed a 2.15 point cut to their customers.
How the Big 4 compare on rate cuts
Of course, that’s not the full story. Graham Cooke, Insights Manager at Finder, says: “The reality is that these numbers don't represent the true cost of borrowing with the Big 4. When you take other factors into account, it's actually a much more even playing field.”
The rates above apply to the banks’ most basic home loan package, but they are not identical products. Crucially, this particular product from nab does not come with an offset account; the packages on offer from CBA, Westpac and ANZ, do.
And this is a key reason nab can offer a lower rate – borrowers cannot make the huge savings possible from cleverly leveraging an offset account.
How to save $111,820 on your home loan
In reality, very few customers actually pay the standard variable rates advertised by banks.
The average Big 4 mortgage discounted interest rate is currently 3.6 percent (don’t forget you pay an annual fee of about $400 for that average 91 basis point discount off the standard variable rate).
This compares against the cheapest quality loan in the market – so one with a genuine offset account that is not going to risk your savings – of 2.17 percent. This is with Well Home Loans and there is an optional offset account for $10 a month.
If you what I call “up stumps” but still “stump up” a $500,000 mortgage – so move but don’t move the amount of the repayment – you will save $111,820 and five years.
No matter which Big 4 bank you are with, if you do just ONE thing to fix your finances for 2021, make it a refinance.