Why don’t lenders drop my repayments when the interest rate falls?

A question that’s been popping up a bit lately has been ‘why didn’t my lender reduce my repayments when the interest rate fell last year?’

It’s a good and timely question considering the big four bank economists all expect the RBA to cut the cash rate by 25 basis points to a new record low of 0.5% on February 4.

So why don’t lenders drop your repayments when the interest rate falls?

This question was debated in November by the House of Representatives’ standing committee on economics during its review of Australia’s four major banks and other financial institutions.

In the red corner you have Dr Andrew Leigh MP, the committee’s deputy chair. In the blue corner you have ANZ CEO Shayne Elliott.

Dr Leigh suggested the bank’s default position – to keep repayments at the same level until the customer requested that they be reduced – was not in society’s best interest.

Essentially, Dr Leigh’s argument was that if banks automatically reduced the repayments then customers would have more money in their back pocket to spend each month. As such, the flow-on effect would have a more positive impact on the nation’s economy.

However, Mr Elliott strongly disagreed.

Mr Elliot said the bank’s default position – to keep repayments at the same level, regardless of the interest rate cuts – was in the customer’s best interest because it helped them repay their loan quicker.

“I find it hard to imagine that I could ever push an argument that it is in my customer’s interest to have [a loan] for longer,” said Mr Elliot.

“Maybe we can be better at communicating. But we contact every single customer every single time there is a rate cut and offer them a chance to review their interest rate and lower their payments.”

According to Mr Elliot, just 7% of home loan holders opted to reduce their repayments off the back of the interest rate cuts last year.

Want to reduce your repayments?

Now, we don’t advocate any particular side of the argument. Basically it will boil down to your individual situation and what you believe is in your best interests financially.

But if you do decide that you’d like to reduce your repayments then get in touch and we can help you make the request with your lender.

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