In my job I always play close attention to what the governor of the Reserve Bank says, but right now so should you – because doing so can save you money.
When the Reserve Bank cut the cash rate earlier this month to 0.10% not one of the big four banks cut their home loan variable interest rates.
They cut some of the fixed loan rates, but those of us holding the common variable rate mortgages got nothing.
This was not actually a shock – the head of the Reserve Bank anticipated it.
Philip Lowe told journalists in a question and answer session after announcing the rate cut that in the past banks would lower “the standard variable rate and all rates would adjust immediately. But what’s happened over the course of the past year is that many banks have left their standard variable rates unchanged.”
This is certainly not ideal given the reason the RBA cuts the cash rate is so that banks will lower their lending rates, giving people more money to spend and thus stimulate the economy.
This does not mean the rate cuts have no effect, but rather the impact comes from a different route.
Lowe suggested “the best outcome would be for standard variable rates to be lowered. But if that doesn’t occur, I’m confident that there’ll be pass through occurring through people renegotiating and switching.”
And then he gave the advice we all should take: “I encourage everybody to go and ask their bank for a better deal … and if they don’t give it to you, switch to a bank that will.”
And so this week I took his advice.
I rang my bank and asked why they had not passed on the rate cut and could they give me a better deal.
I was very quickly given a 35 basis points rate cut on my loan.
This came off the back of my doing the same in October last year when I got a 59 basis points cut.
So all up I am paying nearly 1% point less than I would be had I not picked up the phone and asked.
If you have a 30 year $400,000 mortgage that 94 basis cut is worth $96 a fortnight – or nearly $2,500 a year.
That is not a bad return on two phone calls.
The thing about mortgages is banks rely on you thinking once you have received the loan that the transaction is done, and you have bought a product. In reality it is an ongoing negotiation.
The problem is banks will compete with each other for new loans, but not for ones currently held.
That is why in September (the latest figures we have) the average variable mortgage rate for new owner occupier loans was 2.89% – some 1.63%pts below the average “standard variable rate” of 4.52%.
But the standard variable rate is just a construct each bank comes up with to use as a base from which they will give you a “discount”. But even the average “discounted” variable rate of 3.65% is well above what people are actually being offered.
What is really illuminating for mortgage holders is when you look at the average variable rate paid by everyone who currently has a home loan.
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In September it was 3.18%.
That means the average mortgage holder is paying 0.29% pts more than those who are currently applying for a loan – or around $30 a fortnight more in repayments.
So 3.18% to 2.89% – think of that as you target range. Look at your loan rate and ask if you are paying too much.
Banks want your business, but they also want you to be passive.
Ring up, be polite, ask what they can do.
And if they try to fob you off, just remember to tell them you are only doing what the head of the Reserve Bank told you to do.