Mortgage holders tipped to pay their bank millions in additional payments

Australian mortgage holders will give the major banks $76m in additional payments due to the 10 days it takes for them to pass on a rate cut.

New figures released by Finder shows the big four banks hold approximately $1.13 trillion in household debt, with a 25 basis point cut earning roughly $7.6m a day on the debt.

This means, the 10-day delay on average it takes for the banks to pass on an interest-rate cut will cost households $76m.

Finder home loan expert Richard Whitten said even with the 10-day delay, the major banks were so far passing on the rate cut, something they had not always historically done.

“Of course, the banks aren’t setting rates to be generous. They’re responding to their own funding costs,” he said.

“That is, their costs for borrowing money to fund customers’ loans and other business.”

“And how much profit they think they can get on top of that. The cost and profit calculations of each institution are going to look a little different.”

The Reserve Bank of Australia (RBA) announced on Tuesday, May 20 that it was cutting the official cash rate by 25 basis points to 3.85 per cent.

It follows a fall in Australia’s headline inflation rate to 2.4 per cent in the March quarter, while the all-important trimmed mean inflation rate – which removes volatile components such as electricity and fuel costs – came in at 2.9 per cent.

Either rate falls within the RBA’s inflation target rate of 2 to 3 per cent.

How much will Aussies save?

How much Aussies will save after the rate cut will depend on the size of their mortgages.

Those with a $500,00 debt will save about $76 a month, while those with a $750,000 mortgage are tipped to be $114 better off and Aussies who borrowed $1m will save about $152 a month.

Finder head of consumer research Graham Cooke said more than one in two homeowners didn’t even know their own rate.

Australia's Cash Rate 2022

‘Mortgage repayments have a huge effect on the monthly cash flow of Australian households, yet more than half are unaware how much they could be overpaying each month,” he said.

“With two rate cuts in three months, the average homeowner could be saving thousands.”

He said the average borrower stood to save about $213 per month – $2553 annually – thanks to the interest rate cuts in February and May.

Mr Cooke said loyalty to your lender could be expensive.

“Banks rarely reward complacency, so reviewing your mortgage once a year should be as routine as your tax return,” he said.

When will a rate cut be passed through?

Within 24 hours of the RBA announcing a rate cut, 30 lenders said they were passing on the full rate cut.

This included all four major banks that within 30 minutes of the announcement informed customers that the rate cut would be passed on.

NAB confirmed it would decrease its standard variable home loan interest rate by 0.25 per cent, effective from Friday, May 30, with the 10-day delay in line with previous changes to interest rates in the wake of a cash rate change.

ANZ followed, saying it would also be dropping its variable rate by 0.25 per cent, effective on May 30.

Commonwealth Bank of Australia has moved in line with the other majors and will also drop variable interest rates on home loans by 0.25 per cent.

Westpac told customers it too would pass on the rate cut in full to mortgage holders and savers, albeit a touch slower.

Westpac explained to NewsWire it is faster to move on savings rates compared with mortgages due to the complexity of the different products.

Savings rates are applied universally to every customer, while mortgage holders have differing rates depending on their circumstances.

It was the only one of the major banks to make an announcement on savings rates.

From June 3, the bank will decrease its variable interest rates by 0.25 per cent for new and existing customers.

Bendigo Bank says it will reduce the cash rate in line with the majors from June 6.

Australia’s fifth largest bank, Macquarie, passed on the rate cut on Friday.