Is my bank or lender required to pass on rate cuts?

After weeks of speculation about a potential rate cut, the Reserve Bank of Australia (RBA) has officially lowered the cash rate to 0.10 per cent.

The cash rate is the official interest rate at which lenders are charged to borrow from other lenders. The biggest of these lenders would be the RBA.

The RBA Board meets on the first Tuesday of every month, except January, to set the cash rate, which can be increased, decreased or maintained at the same level. Any cash rate movements can and generally do influence the interest rates that are available to you as a consumer.

This is why many people expect their lender to shave rates when the RBA reduces the cash rate.

But the reality is that lenders are not obliged to pass on a rate cut. When considering whether to change its interest rates, a lender may take into account the market’s overall performance, the lender’s own business performance and what competitors are doing.

It’s up to the banks to maintain the best interests of deposit-holders (or savers) and mortgage holders (borrowers) to manage the banks’ revenues, as well as profits for shareholders, if the lender is a public company.

This is because lower interest rates generally benefit borrowers but reduce the interest savers receive. Under higher interest rates, savers are typically better off, but borrowers need to pay more in interest costs.

Will my interest rate be reduced if lenders aren’t required to pass on rate cuts?

Just because lenders don’t have to pass on rate cuts, doesn’t mean they don’t.

Many lenders generally do pass on rate cuts, at least in part, to attract and retain customers in a competitive market.

Some lenders may even trim their rates in the lead-up to a widely predicted rate cut. In the past month before the rate cut, 35 lenders slashed their mortgage rates, with 29 cutting variable rates and 20 reducing fixed rates.

• Fixed rate borrowers – If you have a fixed rate loan, you’re not likely to be too affected by any rate changes. You generally won’t need to worry too much about paying more or less interest due to a rate change as your interest rate is locked in for a set period. However, if your fixed rate period is coming to an end, it’s worth using an RBA rate cut as leverage to negotiate a lower rate with your lender on your loan.
• Variable rate borrowers – If you have a variable rate loan and the cash rate is hiked, you may need to prepare for higher monthly repayments. If the cash rate is lowered, you could consider either negotiating with your lender for a better rate or refinancing to another lender.

What if my bank doesn’t pass on the rate cut?

If your lender doesn’t automatically pass on the rate cut, there are a few options for you.

Firstly, you could try jumping on the phone and negotiating with your lender. There’s a chance they may cave and offer you a rate cut, if you’re eligible, to keep your business.

If they won’t budge on their rates, then you may consider switching to another lender if you’re either close to the end of your fixed rate period or on a variable rate loan. One of the best ways to secure a better rate is to become a new customer.

Many lenders reserve their best interest rate deals for new customers as an incentive for them to join the lender. New customers typically include new mortgage borrowers and existing mortgage holders refinancing from another lender.

Alternatively, you might want to ask for other incentives aside from a rate cut. Some lenders are also offering lenders’ mortgage insurance (LMI) discounts and cashbacks as a way to lure new borrowers on board.

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