When Interest Rates Fall…

June 22nd, 2009 24 Comments
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Do All Mortgage Holders Benefit?

Australia’s Reserve Bank, like so many around the world, has been cutting interest rates for months and in December 2008, the country’s official interest rate was reduced to its lowest level since May 2002.

It is understandable that mortgage holders might rejoice at the news, but not all of the big banks pass on the full cuts to their variable mortgage rates. And just a very few of the top non-bank lenders pass on the full rate cuts.

Such actions by the banks are not restricted to Australia and mortgage owners throughout the western world struggle to grasp with their banks unwillingness to give them a break. Each time the Reserve Bank makes an interest rate cut announcement, Australia’s politicians implore the banks to allow struggling home owners to benefit by passing on the rate cuts in full.

Home Loans

The rate cuts are welcomed, understandably, by housing lobby groups. They say that a 1% or 100 basis point cut reduces by around $220, the monthly repayment on a $350,000 mortgage – a big saving for young Australian families.

Housing industry experts believe that rate cuts not only provide mortgage relief to existing home owners, but importantly they help more first home buyers purchase a home of their own.

Substantial drops in interest rates increase the borrowing capacity of entry level buyers.


Borrowers who are locked in to a fixed-rate mortgage however, may not be celebrating during times of lowering interest rates. When looking to refinance, they face a difficult choice: continue to pay a higher interest rate, or incur what is often thousands of dollars in penalty fees in order to break their current fixed contract.

They need to consider more than the interest rate – there can be a plethora of conditions attached to exit fees. For instance major banks charge upfront exit fees ranging from hundreds to over a thousand dollars. Charges can also be levied by the new lender.

While fees vary, a borrower who cancels his loan within the fixed period will usually be forced to compensate their mortgage provider for the “economic cost” of breaking their contract. As interest rates fall, this cost becomes greater, and it may already be too late for fixed borrowers to save by refinancing.

Such fees can often come as a shock to people who are on a fixed-term mortgage. They can be very are surprised when they hear what the break free cost is – often it can be far higher than people expect.


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