Australia’s biggest home lender is urging borrowers to contact their bank if they want to trim their monthly mortgage repayments following an expected official rate cut tomorrow.
Financial markets are universally expecting the Reserve Bank of Australia to cut the cash rate on Tuesday by another 25 basis points, which would take it down to 3.6 per cent for the first time since May 2023.
But RBA rate cuts don’t necessarily translate into lower monthly mortgage repayments unless a borrower contacts their bank, with an average borrower set to save $100 a month with each cut.
The Commonwealth Bank has revealed only 10 per cent of home borrowers chose to reduce their monthly direct debit mortgage repayments in May, when the RBA last cut rates.
Borrowers aged 31 to 50, who are more likely to be raising children and battling the cost-of-living crisis, were more likely to opt to reduce their repayments.
Investor landlords were also more likely to ask to cut their repayments, despite the tight rental vacancy rate.
Commonwealth Bank general manager of home buying Tess Sutherland said most borrowers preferred to keep their existing monthly repayments, following an RBA rate cut, so they could pay off their loan faster.
‘One in ten eligible customers opted to lower their home loan repayments after the May rate cut, which is really similar to what we saw following February’s cut,’ she said.
Australia’s biggest home lender is urging borrowers to contact their bank if they want to trim their mortgage repayments following an expected official rate cut tomorrow (pictured is a Sydney shopper)
Tess Sutherland, the Commonwealth Bank’s general manager of home buying, said most borrowers preferred to keep their existing monthly repayments, following an RBA rate cut, so they could pay off their loan faster
‘It shows only a small percentage of customers are freeing up their cash, while most are maintaining higher repayments to get ahead on their loans.’
Of those who chose to reduce their loan repayments, 39 per cent came from New South Wales, the home of Australia’s most expensive property market, Sydney.
Ben Perham, Macquarie Bank’s head of personal banking, said many borrowers battling the RBA’s 13 hikes in 2022 and 2023 had forgotten about the process of asking for mortgage repayments to be lowered after RBA cuts.
‘It’s been a long time since a rate-cutting cycle and many Australians with a mortgage or savings account may need a rate cut refresher,’ he said.
‘The questions you need to ask your bank in a falling rate environment are different, and the answers they give you could cost you thousands.
‘If you’re not getting the best deal, it’s time to switch.’
Borrowers can pay off the principal of their mortgage faster if they keep their repayments unchanged following an RBA rate cut.
Canstar calculated a borrower with an average, $660,000 mortgage would save $150,854 and be paid off six years earlier, on a 30-year loan, if they opted to keep repayments the same instead of reducing their repayments every time the RBA cut rates.
The Commonwealth Bank , Australia’s biggest home lender, has revealed only 10 per cent of home borrowers chose to reduce their monthly direct debit mortgage repayments in May when the RBA last cut rates (pictured is a Sydney auction)
Sally Tindall, Canstar’s data insights manager, said this was the best way to get ahead financially.
‘Not automatically adjusting a borrower’s direct debit in the event of a rate cut might seem, at first glance, unfair but it actually unleashes the potential for you to save tens of thousands – in some cases, hundreds of thousands – in interest charges if you can keep those higher repayments up for the life of the loan,’ she told Daily Mail Australia.
‘The bank will still automatically apply the rate cut, if they have announced it will be passing it on in full, but if your monthly repayments stay the same, the extra money you are no longer paying to your bank in interest charges will instead go into your home loan as an extra repayment, essentially helping you pay off your debt faster.’
Canstar calculated that staying with the same repayment would mean $503,444 in interest over the life of the loan instead of $654,298 – a saving of $150,854.
Headline inflation in the March quarter fell to just 2.4 per cent, putting it on the lower side of the Reserve Bank’s two to three per cent target.
A monthly inflation measure for May showed the consumer price index falling even lower to 2.1 per cent.
Australia’s Big Four banks, as a result, are all expecting a rate cut on Tuesday afternoon.
They had been expecting the RBA to wait until August, following the late-July release of June quarter inflation data.
The futures market is now expecting the RBA to cut rates in July, August, and again in November, which would take the cash rate to 3.1 per cent for the first time since February 2023.
A quarter of a percentage point rate cut on Tuesday would save a borrower with an average, $660,000 mortgage $106 a month on repayments, if they contacted their bank.
This would see monthly repayments fall from $4,081 to $3,975, as a popular CBA variable rate fell from 6.29 per cent to 6.04 per cent.
A borrower, however, can make even lower minimum monthly repayments of $3,645, but take longer to pay off their loan.
