When the Reserve Bank of Australia (RBA) announces a rate change, lenders—including major banks (e.g. the big four banks) and non-bank lenders—independently decide whether to pass on the adjustment to their customers. Typically, when the RBA lowers the cash rate, most lenders reduce their variable home loan rates to remain competitive and support borrower affordability. However, the timing and extent of these rate cuts vary between lenders, with some passing on the full reduction and others applying only a partial decrease.
This article discusses what Get Real Finance clients with variable home loans need to do when the RBA cash rate decreases.
Firstly, Get Real Finance clients need to understand that all lenders (even when you have a broker) will follow this process:
- Decide if they will pass on the rate reduction to its customers.
- Set a date for any reduction.
- Automatically apply any new variable interest rate to related loans from its effective date.
However, all lenders do not automatically adjust any active direct debits to meet the new minimum repayment amounts—which may be a lower amount due to a reduced variable interest rate.
Secondly, Get Real Finance clients need to review their lender’s website (newsroom/announcements section) to:
- Identify if their lender is passing on a reduced variable rate.
- Note the effective date of any reduced variable rate.
If their lender is passing on a reduced variable, then Get Real Finance clients should decide if they want to reduce their direct debit amounts to benefit from a lower repayment amount and therefore improve cash flow. The question is do you want to free up cash flow for other expenses? If yes, then you must update your direct debit on your variable home loan from the effective date (point two above).
However, if you decide to keep your direct debit as is (i.e. same amount, same frequency) and you’re on principal and interest loan terms (P&I), then you’ll be making extra repayments and therefore paying down your loan off faster. Clients must also consider their ‘loan product’ features include:
- Being able to make extra repayments.
- Being able to access extra repayments through a redraw facility (for example).
This is all part of loan management and maintenance. Clients must understand their loan products features and the loan product’s terms and conditions. Including any offset account structures. To learn more, read our article on how to pay your mortgage off sooner.
As your broker, our Loan Review team requests your lender to review the variable interest rate applied on current loans every six months. Whereas most of our competitors request loan reviews every 12 months. Our Loan Review service is separate from the RBA cash rate announcements, which happen when the Reserve Bank Board meet to consider monetary policy settings. Currently, the Reserve Bank Board meets eight times a year, click here for its meeting schedule.
