How Lenders React To A Rate Cut – What You Must Know

When the Reserve Bank of Australia announces a cash rate cut, borrowers across the nation expect lenders to follow through.

The RBA’s recent move to reduce the rate from 4.35 per cent to 4.1 per cent translates to a $96 reduction in minimum monthly repayments for an owner-occupier loan of $600,000 at 6% interest rate for a 30-year term, it’s no surprise borrowers want lenders to cut rates.

So, how do lenders respond? Well, often the excitement quickly turns into frustration as lenders are too slow to respond or worst case, they don’t respond positively.

There are, however, lenders who promptly respond positively and follow through on the rate cut. In this blog, we will discuss why some lenders wait, why some don’t pass on the rate cut at all, and how much you could save if you were to refinance.

What Happens When The RBA Cuts Rates?

The RBA’s role in setting the cash rate is fundamental to Australia’s monetary policy. This rate influences the cost of borrowing money for banks and, consequently, the interest rates they charge customers.

So, the RBA’s rate cuts should reduce the cost of funds for banks and this should lower interest rates on home loans for customers. However, the reality may be a bit different.

While the RBA’s decision serves as a powerful signal, banks and other lenders aren’t legally obligated to pass on the full cut, or any cut at all.

For instance, Australia’s big four banks have announced they will reduce the standard variable home loan interest rate by 0.25 per cent, following the RBA’s decision to lower the cash rate by that amount.

But this doesn’t mean your lender will be responding in the same manner.

How Do Lenders Respond?

Lenders typically respond in one of three ways:

Full Pass: These lenders reduce their variable interest rates in line with the RBA’s cut, providing immediate relief to borrowers.

Partial Pass: Some lenders choose to pass on only a portion of the cut, citing various reasons for retaining the difference.

No Pass: In some cases, lenders may decide to keep their interest rates unchanged, justifying their decision with factors such as increased funding costs or the need to maintain profit margins.

Why Don’t All Lenders Pass On Rate Cuts?

There are several factors that influence a lender’s decision. Here are a few that might push lenders not to pass on the rate cut at all:

Funding Costs: Banks and lenders obtain funds from different domestic and global markets. The costs associated with these funds don’t always align with the RBA’s cash rate.

Profit Margins: Lenders are businesses, and they need to maintain profitability. They may choose to retain a portion of the rate cut to bolster their margins.

Competitive Positioning: Lenders may offer attractive rates to new customers to gain market share but maintain higher rates for existing customers.

Check Whether your Lender Passed On The Rate Cut

The easiest way to check if your lender passed on the rate cut is by visiting lender websites for any updates. Alternatively, you could also search their recent media announcements or check your current interest rate against their rates available for new borrowers.

How Much Can You Save With A Rate Cut?

When interest rates fall, the amount of money you can borrow often increases. Our research shows that even a decrease of just 25 basis points can have a noticeable impact on your borrowing power.

For instance, consider a couple with a combined annual income of $150,000 who have no dependants or other debt obligations. On average, they could potentially borrow around $17,500 more if interest rates were to drop by 25 basis points.

This translates to a substantial increase of 2.28% in the total amount they could potentially borrow for a home loan. This illustrates the impact that seemingly small changes in interest rates can have on the housing market and people’s ability to afford a home.

Read our blog on borrowing power amidst rate cuts to learn more.

And if you want to know how much you can save with a rate cut, why not use our RBA Cash Rate Change Calculator on this page?

What If Lenders Don’t Cut Interest Rates?

If your lender doesn’t pass on the rate cut, you have options:

Negotiate a Lower Rate: Contact your lender and request a rate review. Be prepared to provide evidence of lower rates competitors are offering.

Refinance: Explore refinancing options with other lenders offering more competitive rates.

Consider Fixed vs. Variable Rates: Evaluate whether switching to a fixed-rate loan is a suitable strategy, especially if you anticipate further rate fluctuations.

Recent Trends On Rate Cuts

A definitive list for rate cuts is difficult to provide, as each RBA change brings unique lender reactions.

But big lenders are generally more likely to take more time implementing the rate cuts, while non-bank lenders are often more competitive and may pass on the full cuts quickly.

Here’s how lenders can typically respond:

The big four banks have implemented full rate cuts following this latest decrease in the cash rate by the RBA. Here’s a table showing the changes major banks have implemented.

Key Takeaways

• RBA rate cuts should lower loan costs, but lenders aren’t obligated to pass them on.
• Lenders respond by fully passing, partially passing, or not passing cuts, based on funding and profit needs.
• Check your lender’s website to compare your rate with new borrower rates to see if there are any updates.