When the Reserve Bank of Australia (RBA) announced an interest rate cut on Tuesday, millions of mortgage holders were eager for relief. However, while some lenders acted swiftly, the big four banks—Commonwealth Bank (CBA), ANZ, NAB, and Westpac—chose a more cautious approach. Rather than immediately passing on the rate cut, these banks stipulated that the new rates wouldn’t take effect until later in the month or early March. This delay, although not unusual, has raised questions about why banks are taking their time to pass on the savings.
Why the Delay?
Technically, banks are not required to pass on RBA rate cuts to their customers, but when they do, the timing often varies. The major banks, including CBA, ANZ, NAB, and Westpac, announced their intent to lower variable rates almost immediately after the RBA’s decision to cut the cash rate to 4.1%. While this swift announcement reassured customers, the new rates wouldn’t be applied until February 28 for CBA, ANZ, and NAB, and March 4 for Westpac.
Sally Tindall, Canstar’s data insights director, explained that delays like this are not uncommon. In fact, historically, banks have taken longer to implement rate cuts. For instance, in past cycles, banks have typically delayed rate changes by about 10 to 14 days, and in some cases, even longer. So, while it may seem frustrating, this lag is consistent with the banks’ usual practices, especially when it comes to passing on cuts to mortgage borrowers.
The Mechanics Behind the Delay
When the RBA cuts the cash rate, it lowers the cost for banks to borrow money from each other. This, in turn, reduces the interest rates the banks charge their customers for home loans. However, banks don’t pass these changes on immediately, as they need time to adjust their internal systems and account for other factors, such as competition and profit margins.
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In a falling rate environment, banks can actually benefit from delaying rate cuts. Jonathan Kearns, Chief Economist at Challenger, noted that when rates are falling, banks can continue to charge higher rates for as long as possible, which maximizes their profits. By waiting to pass on the rate cuts, banks essentially earn more during this delay period.
Kearns also speculated that the timing of future rate cuts, especially after the upcoming federal election, may result in even longer delays, as banks could feel less pressure from regulators or the public to act swiftly.
How Much Are You Really Losing?
While it’s understandable to feel frustrated about the delay, it’s important to note that the money you’re paying during this period isn’t necessarily wasted. Even if the banks don’t pass on the rate cuts immediately, your monthly mortgage repayments will still be applied toward reducing your debt.
However, the longer you wait for the rate cut to take effect, the more you could be paying in interest. According to Canstar’s analysis, a Westpac customer with a $500,000 loan could have saved around $45 if the bank had passed on the rate cut on February 19, the day the RBA’s decision took effect. While this may not seem like a significant amount in isolation, over time, these small savings can add up.
Tindall pointed out that customers shouldn’t feel like they’re worse off during this delay, as the money saved from the rate cut will ultimately be applied to paying down the mortgage. However, it’s clear that banks are using this delay as an opportunity to profit from holding onto higher rates for a little longer.
Will My Repayments Automatically Drop?
The answer isn’t always straightforward. While some banks may automatically adjust your repayments to reflect the lower interest rate, others may require you to contact them to request the adjustment. Tindall explained that even if your interest rate drops, some banks will keep your repayments the same unless you specifically request a reduction.
On the bright side, keeping your repayments at the same level, despite a lower interest rate, can actually benefit you in the long run. If your repayment amount stays unchanged, more of your payment will go toward paying off the principal loan balance, which can help reduce your loan term and the total interest paid over the life of the loan.
For instance, if a borrower with a $600,000 loan and 25 years remaining continued to make the same monthly payment after a rate drop, they could save as much as $89,143 in interest and pay off their loan four years earlier. So, while the delay might be frustrating, keeping the same repayment amount could have long-term financial benefits.
Can I Refinance Now for a Better Deal?
If you’re feeling the sting of the delay, refinancing is always an option. While the big banks are taking their time to pass on rate cuts, there’s nothing stopping you from shopping around for a better deal with other lenders. Mortgage broker Ali Kawsar recommended waiting for a couple of weeks to see if your bank adjusts its rates, but if nothing happens, it might be time to look for alternative options.
Refinancing can be a hassle, especially with paperwork and potential switching fees, but Tindall encouraged borrowers to consider this option to take advantage of the current rate cuts. If you haven’t refinanced in a while, securing a competitive deal could not only benefit from the current rate cut but also position you to benefit from future cuts.
The Bottom Line: Patience, for Now
For many mortgage holders, the delay in passing on the rate cut is undoubtedly frustrating, but it’s important to remember that this process isn’t as simple as it seems. While the banks benefit from holding onto higher rates for a little longer, the savings will eventually make their way into your mortgage repayment schedule, helping you pay down your loan faster.
In the meantime, it’s worth keeping an eye on your bank’s actions, contacting them if necessary, and considering refinancing if you feel that the delay is too long. Ultimately, the choice is yours, but with a little patience and vigilance, you could still make the most of the RBA’s rate cut.
