09 Jul What Bank cut what Rates?
Two rate cuts in two months with maybe more to come. But with hundreds of loan products over dozens of lenders, how did these cuts flow onto your loans?
There is a thesis in this topic alone. This is not to be a comprehensive overview but a summation from a point in time.
For the big four banks, the residential rate cuts were as follows;
Bank June 2019 July 2019 Total
ANZ 0.18% 0.25% 0.43%
CBA 0.25% 0.19% 0.44%
NAB 0.25% 0.19% 0.44%
WBC 0.20% 0.20% 0.40%
Just to make sure the results are confusing, different products and different loans received different discounts across the board. There is no need to go into detail, but you can see the trend that three of the four banks had netted a similar end result.
In conclusion, they all sent the RBA staff a bottle of Moet to celebrate the opportunity for the banks to effectively increase their rates by not passing on all the cuts. No mention of this behaviour in the Royal Commission!
What about commercial loans?
There are effectively two types of commercial loans.
The first are Market Linked Loans. This means the pricing of these loans are either directly linked or indirectly linked to the market rate which is the underlying swap rates (30, 90 and 180 day are the most common rollover days).
Any loan that is correlated to the market rate means that all current and future interest rate projections have already been factored in. Hence, there will only be a noticeable change in these rates when the underlying yield curve moves, and a rollover event takes place. More often than not, the yield curve moves very little on the day of a rate cut announcement because it has already been factored in.
The second are Cash Linked Loans. These loans are correlated to the RBA announcements and will only change once the bank has made an announcement as to what the bank is willing to pass on. These loans are usually tied to a “Reference Rate” and the interest rate charged to the loan is a client margin above or below the reference rate.
To try and compare loan types with other banks could easily lead to misrepresentation unless you know how to decode the true cost of funds on a comparable basis.
Taking this knowledge one step further, a borrower on variable rates would be further advantaged if;
- They were on market rate linked products in a falling interest rate environment given that the yield curve builds in rate cuts in advance; and
- They were on cash rate linked products on a rising interest rate environment as the RBA announcements tend to lag the rise in yield curves hence your borrowing rate stays lower for longer.
- The difference between the two could easily be another 25 basis points.
There is a way through the Shock and Awe of fixed loan break costs to capture advantages from loan re-negotiations and take a moment to learn which products are most suitable to pick up further pricing advantages.
Feel free to have a chat to us to see if the above generalisations can apply to your business.