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Interest rate cuts, and what they mean for you

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Are you keen to pay the lowest possible interest rate on your home loan? Then you’ll need to get on the front foot and contact lenders to secure a better deal.

Australia’s big four banks have just pitched extremely low rates for fixed interest-rate mortgages. Meanwhile, the Reserve Bank of Australia is flagging its intention not to raise rates until at least 2024. Although, unless you are proactive and ask your bank for a cheaper mortgage rate, or are prepared to play off one lender against another, you’re very likely to end up paying above-average interest repayments.

The RBA cut the official cash rate by 0.15 basis points to 0.10 per cent on the first Tuesday in November. The Commonwealth Bank of Australia, Westpac, National Australia Bank and ANZ immediately responded by announcing cuts to their fixed mortgage rates and some business loan rates. However, none of the major banks have reduced their standard variable rates for residential home loans.

The latest figures from the largest banks show about 40 per cent of CBA, 30 per cent of Westpac, 21 per cent of NAB and the majority of ANZ customers are on fixed-rate mortgages. The banks lowered fixed interest rates by up to 1 per cent, with CBA offering a four-year fixed-rate at 1.99 per cent in what the bank described as the lowest ever advertised home loan rate.

The big banks claim they cannot afford to cut variable interest rates for existing customers. However, finance analysts say many lenders have taken a commercial decision to bypass and not help their existing customers. Instead, they are offering rate reductions only to new customers in order to win new business – or to existing customers who ask for a cut.

When November’s rate cut was announced, RBA Governor Phillip Lowe said he wanted commercial banks to help the economy by cutting rates for mortgage holders and business operators. “The best outcome would be for standard variable rates to be lowered but if that doesn’t occur I’m confident there will be pass-through occurring through people renegotiating and switching ... I encourage everybody to go to their bank and ask for a better deal,” Dr Lowe said. “If they don’t give it to you, switch to a bank that will.”

While the CBA was the first major bank to make a move on fixed rates, a group of smaller lenders have responded to the cheaper flow of money. Canstar research shows six smaller lenders, including Athena and Pacific Mortgage Group, reduced variable rates between 0.10 per cent and 0.16 per cent.

Nelson Alexander real estate agents are skilled at providing would-be buyers with introductions to mortgage brokers. These brokers typically offer buyers access to a pool of a dozen or more lenders and can give independent advice on the best rates and terms.

The RBA’s rate cut to 0.10 per cent gives certainty to home loan customers as well as to vendors seeking strong levels of competition from buyers with firmed-up funding.

Nelson Alexander Sales Director Arch Staver says property owners and prospective buyers should regularly review their financing options – and doubly so now that official interest rates have been cut to almost zero.

“Interest rates are going to remain very low,” Mr Staver says. “The Reserve Bank governor has declared in a number of recent speeches that the next three to five years are likely to see the same very low-interest rates. This near certainty of continuing low-rate finance means that upsizing and upgrading is very much in front of peoples’ thinking.”

Market watchers say banks are extremely keen to lure attractive new borrowers – people with stable incomes or low loan-to-valuation ratios on home mortgages. However, existing variable-rate borrowers can get a cut by putting pressure on lenders, and by considering “split loans” that are part-fixed, part-variable.

Other elements of the RBA’s November rate cut package include a reduction in the target for the yield on the three-year Australian government bond to around 0.1 per cent. As well, the interest rate on exchange settlement balances has been cut to zero.

Dr Lowe says the measures will help address the high rate of unemployment, which he describes as an “important national priority.”

The combination of the RBA's bond purchases and lower interest rates is expected to help the nation recover economically by lowering financing costs for borrowers, contributing to a lower exchange rate and supporting asset prices and balance sheets. Dr Lowe says the bank is “committed to doing what it can to support the creation of jobs.”

“Encouragingly, the recent economic data have been a bit better than expected and the near-term outlook is better than it was three months ago,” he notes.

If you would like to discuss financing a home purchase and your property needs in greater detail, please contact any Nelson Alexander office today.

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