4 ways to give yourself a rate cut, as the RBA continues to hold

The Reserve Bank of Australia (RBA) has held the official cash rate today at its first meeting of the year. But as we gear up for possible interest rate rises later this year, how can Aussie homeowners keep their rates and repayments low?

At its February meeting today, the RBA announced that the official cash rate would remain at the record low of 0.10%.

“As the Board has stated previously, it will not increase the cash rate until actual inflation is sustainably within the 2% to 3% target range,” RBA Governor Dr Philip Lowe said. “While inflation has picked up, it is too early to conclude that it is sustainably within the target band.”

“The Board is prepared to be patient as it monitors how the various factors affecting inflation in Australia evolve.”

Westpac’s economics team has predicted the cash rate will increase to 0.25% in August and 0.50% in October. So that would be a total increase of 0.40 percentage points by the end of the year.

So what could that actually mean for you? Well, let’s take a hypothetical homeowner with a $500,000 loan at 80% loan-to-value ratio (LVR) as an example. This homeowner makes principal and interest repayments and has a 30-year loan term.

They are currently paying the average variable rate from Canstar’s database of 3.03% and their monthly repayments are $2,116 excluding fees. Now, if their interest rate were bumped up by 0.40 percentage points to 3.43%, that means their repayments would also increase to $2,225. So that’s an extra $109 a month.

There are a few different ways you could offset this. Canstar finance expert Effie Zahos had the following four tips.

1. Say goodbye to package home loans

A package home loan combines your loan with other banking products, such as an everyday bank account, a credit card or an offset account. But they usually come at a cost.

Canstar’s analysis found that almost 80% of lenders on our database at the time of writing charge higher rates on their package variable rate compared to their lowest variable rate.

The average package variable rate is currently 2.85%, with monthly repayments of $2,068, based on our example homeowner. The lowest standard or basic variable rate is 2.27%, with monthly repayments of $1,916. That’s a difference of 0.58 percentage points, or $152 a month that could be saved.

Potential savings: $152 per month

2. If you’ve built up equity, ask for a discount

Some lenders offer cheaper rates for customers with more equity.

Of these loans, the average rate at 80% LVR is 2.26% with monthly repayments of $1,914, based on our hypothetical homeowner.

In comparison, the average rate at 60% is lower at 2.12% with monthly repayments of $1,878. So a difference of 0.14 percentage points and potential savings of $36 per month.

Potential savings: $36 per month

3. Don’t automatically roll from a fixed rate to a variable rate

If you have a fixed rate loan, your loan will automatically revert to a variable rate at the end of your fixed term. This could be higher than other variable rates on offer.

Looking at our hypothetical borrower again, the average rollover rate on a three-year fixed rate is 3.30%, with monthly repayments of $2,181. This is based on the borrower making principal and interest repayments on a $467,372 loan (the amount owing on a $500,000 loan after three years with an original average fixed rate of 2.93%).

If our homeowner instead switched to the average basic variable rate on Canstar’s database, they could get an average rate of 2.72% with monthly repayments of $2,038. That’s a difference of 0.58 percentage points or $143 per month, assuming rates remained the same between now and the end of the borrower’s fixed term.

Potential savings: $143 per month

4. Become a new customer

If you have stuck with the same lender for years, you could be paying for your loyalty.

The latest available RBA Housing Lending Rates data found that outstanding home loans have an overall average interest rate of 2.87%, based on the 12-month average of outstanding loans to November 2021. That works out to monthly repayments of $2,073.

But for new customers, the RBA found that new loans have a lower average interest rate of 2.44% with monthly repayments of $1,960, based on loans written in the 12 months to November 2021. That’s a difference of 0.43 percentage points and a potential saving of $113 per month for our hypothetical borrower.

Potential savings: $113 per month