If you're a home owner who's been hanging out for an interest rate cut, it pays to be proactive.
People might assume their minimum home loan repayments will automatically reduce when a Reserve Bank of Australia (RBA) interest rate cut is passed on by their lender, but this isn't always the case, says Angel Zhong, a Professor of Finance at RMIT University in Naarm/Melbourne.
NAB says "more than 90 per cent of customers chose to keep their repayments unchanged" after May's rate cut.
The Commonwealth Bank says 11 per cent of eligible home loan customers reduced their direct debit repayments after a rate cut in August.
So how do you check whether your repayments have reduced after a rate cut and make adjustments to suit your budget?
Check repayments after a cut
If you have a home loan with a variable interest rate, it can go up or down when official cash rates change.
There's no obligation for banks to pass on official cash rate cuts, but Professor Zhong says "it's a very competitive environment" and banks "risk losing customers" if they don't.
She says if the RBA cuts the cash rate, and your bank passes the reduction on, you still might not see a change to your next repayment.
That's because there are two components to a typical variable home loan or mortgage: the amount you borrow (the principal component), and the interest component.
If the bank doesn't reduce your overall payment after recalculating following a cash rate cut, Professor Zhong says less is going towards interest.
Suzanne Long is a financial counsellor and the manager of the National Debt Helpline in Western Australia, in Perth/Whadjuk Noongar country.
Ms Long says people looking for financial relief can be disappointed when their first repayment rolls around after a rate cut and it's unchanged, "even though the bank says they've passed on the cuts".
"Although that lower cash rate flows through to lower variable mortgage rates, most banks don't automatically reduce their scheduled payments."
On Gadigal land in Sydney, chartered accountant and financial educator Ketvi Roopnarain agrees that people often assume mortgage repayments will change.
A rate increase is often passed on to customers quickly, but Ms Roopnarain says some lenders "take a lot of time to reduce their rates" or "they may only choose to do a partial rate cut".
How to opt in to lower repayments
Professor Zhong says adjustments to repayments will differ between lenders.
"Some banks actually reduce your overall payment automatically … [while] some banks will only lower the total amount of your payments if you manually request it".
She recommends checking "your payment settings" online to see how your minimum payments are altered.
Westpac has previously adjusted minimum monthly repayments automatically and Macquarie Bank says it automatically adjusts customers direct debit amount when their variable interest rate changes.
In comparison, the Commonwealth Bank, NAB and ANZ say customers can adjust their repayments online following a rate cut.
Ms Long recommends people contact their lender if they want to reduce their repayments.
"Ask for a recalculation of the minimum repayments based on the new interest rate."
She says this can usually be done via online banking, a phone call or by visiting a branch.
"I suppose the biggest thing is that if you do need more cash in your budget … the key is to act. Don't assume that the bank will do it for you."
Is it worth sticking with higher repayments?
If you can afford it, Professor Zhong says continuing to pay a higher amount after a rate cut "could be a good idea, because that means paying off your balance faster".
Moneysmart finance expert Justine Davies says this mortgage calculator can show how much interest you might be able to save over the life of your home loan if you maintain higher repayments.
"For example, total repayments on a $500,000 mortgage over 25 years, at 5.70 per cent per annum interest would be around $940,000. If the interest rate went down by 25 basis points and you kept the same repayment, your mortgage could be paid off more than a year sooner and cost $46,000 less."
This is general information only. You should consider obtaining independent professional advice in relation to your particular circumstances.
