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What Happens When Interest Rates Go Down in Australia?
170 Plays2 months ago
Are interest rate cuts really the relief they seem to be? In this episode, we uncover how banks might hold back on passing the full benefits to you, costing you thousands over the life of your loan. Learn actionable strategies to make the most of rate cuts, reduce your mortgage faster, and explore tools like offset accounts, redraw options, and refinancing to stay ahead in today’s market. Whether you’re buying your first home or managing an existing loan, this episode is packed with tips to save big and take control of your financial future.
Want to take charge of your mortgage and build wealth? Get a free home loan health check from Hunter Galloway – the home for homebuyers. Visit huntergalloway.com.au or call 1300 088 065.
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Transcript
Banks and Interest Rate Cuts
00:00:00
Speaker
What if I told you the next interest rate drop might not save you a single dollar on your mortgage? It sounds shocking, right? But here's something that banks may not tell you. They may choose to only pass on half or even less of the next rate cut. If you're not careful, this could mean missing out on thousands of dollars in savings. I'm gonna show you how exactly to avoid this trap and how to get those savings working for you.
00:00:20
Speaker
Welcome to the Buying Your First Home Podcast, your personal guide through the Australian housing market. Here we tackle the big questions and the small details that come up when buying your first home. From financial prep to finding the right neighbourhood, we're here to ensure that you've got all the knowledge at your fingertips. So let's take the first step towards unlocking the door to your new home.
Impact of Rate Cuts on Mortgages
00:00:45
Speaker
Right now, everyone's talking about interest rate cuts. Australia's big four banks, the ComBank, Westpac, NAB and ANZ are all predicting the Reserve Bank could start dropping rates as early as next month. CBA and Westpac are forecasting four rate cuts that could bring the cash rate down to 3.35% by the end of 2025. NAB thinks it could even lower and ANZ is probably a bit more conservative. First, let's look at what a rate cut could mean for you. Let's say you have a $500,000 mortgage. A 0.25% rate cut could mean you'd save $74 each month or $888 a year. And while this sounds like great news for home buyers, there is a catch. The banks don't actually have to pass on those rate cuts to you. So if the bank only passes on a 0.15% rate cut, your savings drops to only $44 a month. And over the life of your loan, this reduced savings could add thousands of extra dollars of interest on your loan. That comes from your pocket and not the bank's. And it's reasonable to think surely the banks don't pass on the rate cut, right? Well, history tells us that's not always the case. Did you know that in 2019 to 2020, the Reserve Bank slashed the rates by 1.4%, but the banks didn't pass on all of that to their borrowers? CBA cut by 0.82%, West Bank cut by 0.8%, now by 0.84%, and they did slightly better at 0.97%. This means that Aussie homeowners could have missed out on up to 0.6 worth of potential savings. Instead of that money going into your back pocket, it's paid all worth the banks. And these historic figures don't say ANZ is going to be the bank that's going to pass on the most because it depends on the standard variable rates at the time, the discounts that you have, but the big question right now is, will they pass on the full amount of rate cuts we might see this year?
Mortgage Distress and Bank Profits
00:02:16
Speaker
In my opinion, they'd be mad not to. CVA just posted a huge profit for the first quarter of this financial year with $2.5 billion. dollars NAB, Westpac and ANZ have all posted slight decreases in their most recent results, but they're still making billions of dollars.
00:02:30
Speaker
And yet in the meantime, as of August last year, 2024, more than two in five home buyers reported struggling to pay for their home loans. That means up to 1.4 million Australians are facing mortgage distress. This is the highest level since they began tracking in 2019. Now, it's not to say the property market is going to completely drop or something catastrophic is going to happen. It's just more and more people are feeling the pinch with the cost of living crisis going through all right now. I'd be surprised if the major banks didn't pass on the first full rate cut when it does happen.
00:02:55
Speaker
And if they don't, it could be time to find a new lender.
Strategies for Managing Mortgage Repayments
00:02:58
Speaker
But before we get to that, let's take a look at what you can do to get your home loan rates down. As the rates start to come down, your default minimum mortgage repayment will also reduce. But if you can keep the repayments the same amount, i.e. you keep paying as if the interest rate's higher, but actually the minimum repayment goes down, you'll be chipping away the principal much faster loan, which means you pay less interest over time and you're going to pay off the home loan way quicker. Most banks will automatically keep your repayments the same unless you ask them to lower it. So unless you really need the cash sticking to the old amount can be a really smart move. It may not seem like a lot at the time, but let me show you a quick story on how this helps one of our clients. A few years ago, Lisa had a $400,000 mortgage at 5% over 30 years. After a rate cut of 0.5%, her minimum repayment dropped by $35 a month, but Lisa kept her payments the same, which meant she was able to pay an extra $420 in principle that year. That may not sound like a huge amount, but over the life of the loan, she's set to save over $10,000 in interest. Think about what you could do with 10 grand. It's holiday or a safeten, it's huge.
00:03:53
Speaker
On the other hand, if you're feeling in the pinch and you prefer a bit more flexibility, you could consider putting those extra savings into an offset account or the redraw. These accounts that you keep access to those additional savings, that $400 without competing funds when you can still get them back if you need. An offset account is just a regular account linked to your mortgage where any balances offset what you owe. A redraw account lets you make extra payments on the mortgage and still access those funds if you need them. They're both awesome tools to help you save on interest costs while keeping your savings within reach.
Negotiating and Refinancing Home Loans
00:04:20
Speaker
But what happens if your bank doesn't pass on the savings to you? They don't cut your rates. Well, the good news is if you're one of our clients, you don't need to worry.
00:04:26
Speaker
We do regular home loan health checks for all our clients to make sure they're getting the best possible deal. We'll call up the bank, give them a hustle. If not, we'll look at other deals. If you have a loan directly to the bank or your broker isn't keeping on top of your home loan, here's what to do. Take a few minutes to look at the rates across the different lenders and banks. You can just quickly jump on Google and find this out. If you're getting a better deal or other lenders are passing on the rate cuts more fully, consider refinancing. It's easier than ever to switch and you could lock in savings that could last a lifetime.
00:04:51
Speaker
You can also try to negotiate directly with your bank. Think of it as being on the same team. You want the best rate and the bank wants to keep you as a customer. Don't be afraid to ask because even a small drop, 0.05%, 0.1% in your rate can make a huge difference over the life of the loan. Here's a simple plan. Do a bit of research on what other banks are offering, then call your bank for a rate adjustment.
00:05:08
Speaker
I even like looking at ING, they usually have all their rates on their website, pretty transparent and a lot of banks are happy to compete with them because they're a bigger bank. Some banks, if you bank with say Westpac or CBA and you say I'm going to Billy Bob's credit union, they're going to say, well, they're not a competitor, but they do consider ING or say Macquarie Bank an equal competitor and we'll try and match their rates. Once you've got this info, call your bank and ask for a rate adjustment. Sometimes you'll need to speak to the retention team or even just their home loan specialist to say, well, I want to get a better deal. Be polite and direct. Let them know that you're exploring other options. Banks often have a dedicated team. And like I said, they'll try and get you to compare apples with apples. I definitely wouldn't hesitate to make a call.
00:05:46
Speaker
If free financing feels out of reach because of changes in your income or credit concerns, reach out to your lender early. If you are feeling that pinch, a lot of banks do have hardship options like temporary repayment reductions. They look at moving interest only if things are getting overwhelming. It's worth giving them a call to try and get some help. You can also check out some free financial counseling services that are offered. The government actually offers this. They give tailored advice and can help you out if you're not sure where to go.
00:06:10
Speaker
And remember, there's more banks than just the big four. There's lots of small lenders and credit unions that sometimes pass on the rates more fully in a way to attract customers. So have a chat to your broker to see what is available out there.
Expert Advice from Hunter Galloway
00:06:21
Speaker
At the end of the day, every dollar saved is one step closer to your dreams, whether it's your first home, home upgrade, an investment property, or just peace of mind knowing that you're in financial control. Taking these steps can unlock those dreams faster than you think.
00:06:33
Speaker
And at the end of the day, we're here to help you make it easier. At Hunter Galloway, we're a mortgage broker. We're based in Brisbane. We help people all around Australia and we offer free home loan health checks. If you're not sure, you feel nervous about calling the banks and we just want a quick chat. Hit us up at our website, Hunter Galloway. We're here to have a look and can give you a look after five minutes chat to whether you know, if it's worth refinancing and what the best way forward is.
00:06:53
Speaker
If you want, give us a call on 30800 088 065 or like I said, go to huntergalloway dot.com.au for a free assessment. And if you have any questions, hit us up in the comments below. I read every single one. Thanks so much for watching the video and until next time, see you guys.