Don't bank on the RBA for the big savings, experts

The Reserve Bank of Australia delivered some much needed relief for homeowners with 0.25 percent cut to the official cash rate this week, the second reduction this year.

If passed on in full, a 0.25 percentage point rate cut represents a repayment reprieve of $44 per month to a variable rate home loan customer with a typical mortgage of $300,000, according to Australia’s leading financial comparison website RateCity. This calculation assumes paying the average interest rate of 5.64 percent (before any rate cuts are applied). 

However experts are warning consumers to resist the temptation to rely exclusively on the central bank for delivering savings, with Alex Parsons, CEO of RateCity, advising that comparing home loans and refinancing into a better deal will help keep mortgage costs in check.

“While we would expect lenders to pass this cut on in full, we know this has not always historically been the case. The main thing for borrowers to remember is that they really don’t need to wait for an RBA rate cut. Far bigger cuts are available by comparing and switching to a better deal.”

It’s worth noting that many of lenders are expected to pass the rate cut in full, with Westpac taking the extraordinary step of delivering a 0.28 percentage point reduction, which is in excess of the RBA move.

“There’s a lot of lazy money out there. Refinancing from the average rate into one of the lowest variable rates on the market would mean savings of over $150 every month, or over $200 per month if today’s cut is passed on to customers,” says Parsons.

Lisa Montgomery, CEO of lender Resi, agrees that consumers shouldn’t rely entirely on the RBA for low-cost home loans.

“When choosing the right mortgage, a low interest rate is only one of the variables to consider,” says Montgomery.

“Many home loans have hidden charges, so low or no fee options can keep a lid on upfront and ongoing mortgage costs,” says Montgomery.

Montgomery also urges consumers to take advantage of features like redraws and 100 percent mortgage offsets to make a dent in mortgage costs.

“Also don’t fall into the trap that a low interest rate means automatic savings because if the loan isn’t structured correctly, you might be missing out,” she says.

“I’d urge borrowers to work with a mortgage specialist who can design a mortgage with the right loan features to create long-term wealth.”

Finally, to get the most out of a rate cut, RateCity’s Parsons urges borrowers to keep their repayments high, where possible.

“If you can afford to reinvest even some of the savings from the rate cut into your home loan it will go a long way to reducing your interest bill,” he said.

“Paying an extra 10 percent in repayments each month towards a 25 year home loan you will slice 4.25 years off the loan regardless of the size of the loan.”

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