Will the banks pass on any more Reserve Bank interest rate cuts?

Borrowers hanging out for even lower lending rates from their bank, and savers hoping for a reprieve from further cuts, might be interested to hear that at this point, whether or not the official cash rate moves may not be so important.
Will banks pass on RBA cuts October 2020
Households might be interested to know if the cash rate could impact their mortgage or savings rate. Image source: WAYHOME studio, Shutterstock.

Speculation is building as to what the Reserve Bank of Australia (RBA) will announce at its monthly monetary policy meeting at 2:30pm AEDT today, due just hours before the Federal Budget update is broadcast to Australian lounge rooms at 7:30 this evening.

Some economists expect no change to the cash rate or monetary policy this month to allow time for the Budget measures to sink in, while others such as Westpac’s Chief Economist Bill Evans have predicted the cash rate could fall by 0.15 percentage points to a new low of 0.10%.

Borrowers might be wondering how much more their home loan interest rate could be reduced by if the cash rate goes down today or at the next RBA board meeting in November, while savers may be hoping to avoid any more interest rate cuts on their deposit accounts.

Typically, both home loan and savings rates have followed the downwards trajectory of the cash rate, as shown below:

Interest rates compared to cash rate - 6 October 2020

Canstar finance expert Steve Mickenbecker said a cash rate cut just five hours before the Treasurer delivers his budget may be “symbolic at best”, with term funding support and monetary policy settings doing more to support the low lending rates we’re seeing at the moment.

To explain, early on in the COVID-19 pandemic, the RBA’s term funding facility (TFF) was introduced with a rate of 0.25% in an effort to provide a source of cheap borrowing for banks and other authorised deposit-taking institutions (ADIs), thereby helping to lower interest rates for households and businesses. More recently, RBA Governor Philip Lowe announced last month that the TFF would be expanded, to make a total of about $200 billion available. There’s also the three-year government bond target of around 0.25%, designed to lower funding costs across the economy.

“To a degree, those measures are really what’s supporting the low lending rates we’re seeing at the moment,” Mr Mickenbecker said.

He said there could still be a little room to move for some banks, but probably more-so among the alternative, non-ADI lenders that aren’t reliant on deposit or savings customers and can price their home loans based purely on their own wholesale funding costs.

The major banks and other ADIs, on the other hand, might not have as much wriggle room to lower home loan rates further, because their loans are substantially funded by their long-term deposit customers.

They do need retail deposits, they need peoples’ savings accounts, for longer-term diversity of funding sources and stability of future funding and to maintain credit ratings,” Mr Mickenbecker said.

“So in order to maintain their deposit base, that puts a little bit of a floor on how low home loan rates can go.”

The lowest variable owner-occupier home loan rate on Canstar’s database from a big four bank is the 2.19% two-year introductory rate (2.62% comparison rate) from Westpac for customers paying principal and interest with at least a 30% deposit, while the lowest non-major bank variable rate on the database is Reduce Home Loans’ 1.89% (1.98% comparison rate) for borrowers with a deposit of 40% or more of the property’s value.

In September, lenders generally provided encouragement to new borrowers and relief for refinancers, with 22 lenders on our database cutting variable home loan rates for new lending during the month.

Interestingly, Mr Mickenbecker noted it appeared those interest rate cuts were often being banked rather than spent, as many consumers elected to build a contingency or emergency savings buffer into their household budget.

Irrespective of what the RBA decides this month or next, Mr Mickenbecker said there were a number of competitive home loan rates around that were comfortably below 2.50%.

“If you’re still in a good shape financially to qualify for a loan, you should be making sure you’re on one of those very good rates,” Mr Mickenbecker said.

In terms of savings accounts, the major banks haven’t been particularly generous to savers, with recent cuts ensuring all four’s highest savings rates for most adults are under 1% – the highest being Commonwealth Bank’s 0.90% rate. That said, Westpac does have a 3% savings rate available to customers aged 18-29 who are able to meet certain eligibility criteria. Elsewhere, there are rates as high as 2% available on Canstar’s database from non-major banks.

Across the board, savers have not been as lucky as borrowers, with 37 providers on Canstar’s database having trimmed interest rates on their savings accounts in September.

How much could you stand to lose, or save, if the banks pass on a cash rate cut?

Canstar’s research analysts took a look at what could happen to average home loans and savings accounts if the official cash rate of 0.25% were reduced by 0.15 percentage points, as predicted by Westpac.

They found that if the RBA were to cut the cash rate by 0.15 percentage points and home loan providers followed suit, the average variable rate on a $400,000 loan would drop from 3.38% to 3.23%, seeing borrowers on this average rate pocket an extra $33 each month and save around $11,900 in interest over the life of a 30-year loan, assuming rates remained the same thereafter.

Savers, on the other hand, could see the average total bonus savings rate fall from 1% to 0.85% if banks followed the RBA. This could see savers with $10,000 miss out on over $15 annually.

 

This article was reviewed by our Sub Editor Tom Letts before it was published, as part of our fact-checking process.

 

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