Lenders not automatically passing down variable rate cuts to interest-only consumers
Posted on Friday, November 16 2012 at 9:59 AM
Just because lenders announce rate cuts doesn’t mean these cuts are automatically passed on to interest-only mortgage holders, as one property investor discovered recently.
Twelve months since signing up for her investment
loan, one investor, preferring to remain anonymous, told Australian Property Investor she
only recently discovered the variable rate cuts announced by her lender
following official cash rate cuts weren’t translating to a reduction on the
variable component of one of her interest-only loans.
Since recently contacting her lender to request the
announced rate cut be applied to her loan, her weekly repayments have reduced
by $50 per week.
While the investor has missed out on the savings from
rate cuts over the past 12 months or so that she’s held the loan, she admits to
feeling a little relieved that only 20 per cent of the loan was variable
otherwise the lost savings would have added up to so much more.
Finance broker Lisa Sanders of Your Future Strategy
is “mortified” that investors are being put into the situation of phoning their
lenders to request the rate cut be passed on to an individual loan after it
being announced in the media.
“How appalling is it that lenders are letting their
clients slip through the cracks? Though I’m also not surprised,” Sanders says.
“What’s happening is a lot of lenders are now tiering
their rate reductions – so they’re picking and choosing who they’re giving
reductions to.
“When the Reserve Bank announces a cash rate cut it’s
usually the Big Four banks who make their rate cut announcements first. The
smaller banks and non-bank lenders usually wait for the Big Four rate cut
announcements then generally take an average of the four. Then all lenders
decide what to pass on to their new and existing clients.”
So even though rate cuts are announced in the media,
they sometimes come with conditions and often are only intended for new
customers, though lenders won’t announce this, she says.
Usually in a competitive market most lenders will
pass on a rate cut to clients, however the full rate cut may only be extended
to new clients, she says.
Existing clients, particularly those perceived as
‘higher risk’ are more likely to take the back seat, Sanders adds.
For example, low doc loan clients (self-employed
mortgagees unable to produce sufficient financial paperwork) may not receive
any discount because the lender knows they’re unlikely to be able to refinance
with another lender, she says.
Borrowers with a loan-to-value ratio of 90 per cent
or higher are also more likely to draw the second straw because they’re
perceived to be a higher risk to lenders and are also less likely to refinance
elsewhere, Sanders adds.
David Thomas of Trilogy Investment Funding says it’s
usually the smaller lenders which are less likely to pass on the rate cut to
clients and are more likely to be selective about who gets the rate cut.
“This is often because the smaller lenders are under
less media scrutiny than the Big Four banks,” he says.
Sanders says what these lenders are trying to do is
claw back their losses made in the GFC.
Just because a borrower is perceived as a higher
risk, it doesn’t mean he or she shouldn’t pick up the phone to ask for the rate
cut; quite the opposite, Sanders says.
“Borrowers need to be aware this is happening and
check statements regularly,” she adds.
“If rate cuts aren’t being passed down then they
should be getting on the phone to their existing lender and asking for it
rather than expecting it to just happen.”
Pushing aside the rate cuts made in line with the
Reserve Bank’s cash rate movements, Thomas says borrowers should also pay close
attention to the rates being offered to attract new clients, particularly if
the criteria is the same as the loan an investor may have taken on 12 months
prior.
“Investors should be getting on the phone telling
lenders their loans met the same criteria as the advertised rate being offered
to new clients and ask the lender to match the rate,” he says.