Homeowners told to brace for interest rate cut bombshell from banks

Banks have a strong record of passing on the first interest rate cut in a rate easing cycle but not always the rest.

Homeowners hoping for further interest rate relief may be disappointed – even if the Reserve Bank makes the landmark decision to cut the cash rate this month, mortgage analysts have warned.

The review of previous periods of declining interest rates showed banks had a habit of being generous in passing on the first cut in a rate easing cycle but subsequent cuts were rarely passed on.

This pattern was most noticeable during the early onset of the Covid pandemic in 2020, when the Reserve Bank cut the cash rate to a historic low of 0.1 per cent, plus the year prior.

Mortgage comparison group Mozo revealed the experience of past cycles did not bode well for current homeowners hoping for their bank to deliver new savings over July.

Mozo finance expert Rachel Wastell said history suggested many lenders would probably not pass on the next cut in full.

“Looking back historically at past cutting cycles, lenders are less likely to pass on subsequent cuts,” she said.

She pointed to June 2019, when over half of lenders passed on the first full 25 basis point RBA cut in that cycle. Only 15 per cent did the same after the next cut a month later.

Just 9 per cent of lenders passed on an additional cut that October.

A similar trend played out during the pandemic. The first emergency cut in March 2020 was widely passed on — only 13 per cent of lenders Mozo tracked didn’t pass it on in full.

But the second cut was barely reflected in home loan rates, with ANZ the only major lender to pass on even part of the cut.

The final cut in that cycle — 15 basis points in November 2020, took the cash rate to 0.10 per cent but banks showed even more restraint in passing that savings on, Ms Wastell said.

Many economists are expecting RBA governor Michele Bullock to announce a cash rate cut in July. Picture: NewsWire / Nikki Short

Just under a quarter of lenders didn’t pass the November 2020 cash rate cut on in full, and 43 per cent didn’t pass it on at all.

“We’ve seen that banks tend to be generous early on, often with the first cut, but then start holding back as the cycle continues, particularly as they try to protect margins,” Ms Wastell said.

Lenders have so far been fairly quick to pass on the two Reserve Bank cuts announced in February and May.

Both cuts were broadly passed on in full by lenders, with Virgin Money the only exception in February. Virgin later relaunched its variable home loan range, introducing basic and offset options.

“Not one lender in May followed Virgin Money’s playbook and, as of July, no lenders have publicly announced they are withholding the RBA rate cut.

“In fact, (all) of the lenders that Mozo tracks passed on the 25 basis point rate cut to variable rate home loans.”

Global economic uncertainty has raised the prospect of rate cuts. Picture: Jason Franson/The Canadian Press via AP

Ms Wastell added that there was a strong chance mortgage products would begin diverge if the Reserve Bank announced a new cut.

“If cuts continue, we may start to see a split in the pack,” she said.

“Borrowers can’t afford to assume their bank will do the right thing, and borrowers should watch their lender like a hawk, especially if their rate starts with a six.

“There’s no excuse for complacency. If your rate still starts with a six after two RBA cuts, it’s time to move.”

Mozo analysis also revealed that banks were very quick to pass cash rate cuts to savers but took significantly longer to reduce interest rates for mortgage holders.

“Another thing we’re watching closely is savings rate movements. In both February and May, many savings account rates were trimmed before home loan rate cuts were fully passed on.

Donald Trump’s economic policies have created an air of uncertainty across global markets. Picture: Omar Havana/Getty Images

“That’s a tactic we’ve seen before: lenders move early on savings (where there’s less customer scrutiny), and wait a few days, or sometimes a week, to cut home loan variable rates.

“The further we go into a cutting cycle, the more important it is for borrowers and savers to watch their bank more closely.”

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