02-06-2025
Legal bank move could save you $144,000
May's interest rate cut – the second for 2025 – is great news for buyers and owners alike. Not only does it reduce interest costs, the rate cut also raises the borrowing capacity of aspiring buyers.
But that's not all.
The second rate cut appears to have reignited the 'mortgage wars ', with lenders becoming more competitive to secure new business amid widespread expectations of more rate cuts to come.
We saw evidence of this when many lenders cut their fixed rates weeks before the Reserve Bank's meeting this month.
Sally Tindall from Canstar told the media that fixed rate home loans had now fallen below 5 per cent. She also said that while it was normal to see fixed rates fall in anticipation of an RBA cash rate cut, some lenders were also cutting their variable rates for new customers at the same time.
This indicates that competition is heating up, which is greatly beneficial for both new and existing borrowers. Home owners who already have a loan should stay in touch with their broker. A few more rate cuts might make refinancing to another lender offering a better deal worth your while. The latest prediction from Macquarie is three more 0.25 per cent rate cuts in July, August, and November.
There is no guarantee this will happen, but it's reasonable to be optimistic given inflation is now back in the target 2 per cent to 3 per cent band. That was the Reserve Bank's main objective when it raised interest rates 13 times in just 18 months between 2022 and 2023. After the RBA meeting this month, Governor Michele Bullock said the board expected underlying inflation (that's the measure the RBA pays the most attention to) to hover about the midpoint of the target band over the next year or so.
As for the impact on the property market, this second rate cut for 2025 is likely to boost activity a bit because it will give people extra confidence that we are now on a downward trend with rates. But I don't think we'll see a meaningful increase in market activity until we've had three or four rate cuts. If you have a home loan with NAB, CBA or ANZ, your rate cut went into effect last Friday.
According to CBA, a 0.25 per cent rate cut is worth about $80 per month in savings for borrowers making principal and interest repayments on an average loan of $500,000. And since this is the second 0.25 per cent rate cut for 2025, the combined saving is about twice as much. But there's a catch. (If there are five rate cuts this year, you could save up to $144,000)
Some banks require you to opt-in if you want to lower your overall monthly repayment after an interest rate cut. If you don't, the bank may keep your repayment amount the same, but increase the portion going to the principal and decrease the portion going to interest.
Paying more principal, in theory, is a positive thing.
But if you need the extra cash flow that rate cuts provide to help you cope with today's high cost of living, you might need to make a phone call. According to CBA, only 14 per cent of eligible borrowers called the bank to request that their home loan repayment be lowered after the first rate cut in February.
This indicates that borrowers were either keen to accumulate extra redraw funds for a rainy day, or they didn't understand that their overall mortgage repayment would not be adjusted automatically. So, check your paperwork or call your bank to ensure your home loan repayment is adjusted in whatever way suits your individual circumstances.
