10 Feb No rate cut, but the question remains: “Why don’t lenders drop my repayments when the interest rate falls?”
A question that’s been cropping up a bit lately has been “why doesn’t my lender reduce my repayments when the RBA drops the cash rate?”
It’s a good and timely question considering the big four bank economists all expected the RBA to cut the cash rate by 25 basis points to a new record low of 0.5% on February 4.
The anticipated rate reduction didn’t happen this month – the rate was left on hold at 0.75%.
Why don’t lenders drop your repayments when the interest rate falls?
This question was debated in November by the House of Representatives’ standing committee on economics during its review of Australia’s four major banks and other financial institutions.
In the red corner you have Dr Andrew Leigh MP, the committee’s deputy chair. In the blue corner you have ANZ CEO Shayne Elliott.
Dr Leigh suggested the bank’s default position – to keep repayments at the same level until the customer requested that they be reduced – was not in society’s best interest.
Essentially, Dr Leigh’s argument was that if banks automatically reduced the repayments then customers would have more money in their back pocket to spend each month. As such, the flow-on effect would have a more positive impact on the nation’s economy.
However, Mr Elliott strongly disagreed.
Mr Elliot said the bank’s default position – to keep repayments at the same level, regardless of the interest rate cuts – was in the customer’s best interest because it helped them repay their loan quicker.
“I find it hard to imagine that I could ever push an argument that it is in my customer’s interest to have [a loan] for longer,” said Mr Elliot.
“Maybe we can be better at communicating. But we contact every single customer every single time there is a rate cut and offer them a chance to review their interest rate and lower their payments.”
According to Mr Elliot, just 7% of home loan holders opted to reduce their repayments off the back of the interest rate cuts last year.
What used to happen during a rate cut?
Back in the day a rate cut was like a shining beacon of fun. Repayments were reduced, holidays booked and the surplus funds now available were ploughed back into the economy for the benefit of all.
Dropping rates isn’t in the banks best interests.
Yes, it’s wonderful that not reducing your repayments provides you with a cash buffer and means you are paying back your mortgage faster – we can’t disagree with that, but it’s not only in your best interests. The more you have available as surplus funds in your loan account, the less the banks have to borrow in order to be able to lend. And because banks are accountable to shareholders, their own profitability is paramount.
Reducing your repayment has a good side for you.
If you choose to reduce your repayments, think about what you could do with the surplus. Yes, yes, a holiday would be wonderful, but there are plenty of worthwhile investments you could make to your home to make your money work for you.
- Invest in solar power or hot water to reduce your electricity grid requirements and bills
- Invest in rainwater tanks to save cash on your water bills
- Invest in landscaping to improve your property’s value
- Consider an external refresh of your property to improve it’s value
Want to reduce your repayments?
Now, we don’t advocate any particular side of the argument. Basically it will boil down to your individual situation and what you believe is in your best interests financially. We see both sides of the scenario and how they benefit each side differently.
But if you do decide that you’d like to reduce your repayments, or want to look at what another lender has to offer, then get in touch and we’ll help you navigate the process.
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