Australia’s Big Four banks have not passed-on the October 7 Reserve Bank of Australia rate cut as a reduction in monthly repayment.

In his October 7 statement on monetary policy announcing the 1% reduction in interest rates, Reserve Bank of Australia governor Glenn Stevens said the intention was “to bring about a significant reduction in costs to borrowers”. Mr Stevens said the deterioration in prospects for global growth meant that there was “now present the risk that demand and output could be significantly weaker than earlier expected.”

But the Big Four banks appear reluctant to assist the RBA’s intention of increasing consumer and business spending above the sharp slowdown that would otherwise have been a prospect. Most banks did not pass on the reduction in full.

On October 7, Westpac, the National Australia Bank, Commonwealth Bank and ANZ Bank reduced standard variable home loans and business loans interest rates by 0.8% to 8.56%. On October 17, the ANZ further reduced rates by 0.25% and on October 19, the NAB said it would reduce rates by a further 0.2% effective from October 27. Westpac said today October 21, it would reduce interest rates a further 0.2% to 8.36 effective from October 27.

Here’s the kicker: none of the Big Four have automatically reduced repayment rates.

A Commonwealth Bank customer service officer said the bank had changed its policy and the reduction would be in the term of the loan, rather than in the repayment rate. Customers must apply for the reduction in repayment rates.

The ANZ Bank said it similarly had changed policy. An ANZ spokeswoman said that when the bank decreased a customer’s variable home loan rate, the minimum repayment amount would also decrease.

“Customers can lower what they currently pay to the new minimum repayment amount,” the spokeswoman said. “ANZ does not automatically lower a customer’s loan repayment arrangements as some customers prefer to pay more than the minimum required amount to pay off their loan sooner,” she said.

NAB spokeswoman Luisa Ford said the NAB retained its existing policy of making repayment reduction automatic “on the anniversary of the loan”. Assuming an even take-up of mortgages through the year some will have more money to spend immediately and others will have to wait for up to 12 months to see an increase in expendable income.

Despite Westpac’s group executive of retail and business banking Peter Hanlon saying the interest rate cut of October 21 “can reduce customers’ monthly repayments by approximately $35 on a $250,000 mortgage, delivering further timely relief to household budgets,” Westpac does not automatically reduce repayments with rate cuts.

So the major four banks will automatically increase repayment rates when interest rates go up, but will not automatically reduce them when rates go down.

A Bendigo Bank spokesman said the bank retained its existing policy of passing on interest rate and repayment reductions automatically. The Bendigo Bank has reduced its standard variable rate by 0.8% to 8.6%.

But a Reserve Bank of Australia official said that a 0.8% reduction in interest rate would make a substantial reduction in the duration of the loan.

According to a Bendigo Bank consultant, the repayments on a $250,000 loan at the old rate of 9.4% would require repayments of $2,091.90 a month for 30 years.

At 8.6% the repayments would be reduced to $1,948.03 over 30 years or at the existing repayment amount of $2,091.90, the term of the loan would be reduced to 22.92 years.

David Langsam is the editor of Biotech Daily. Previously he was the London Correspondent for the Washington DC-based Bureau of National Affairs titles writing on economics, finance and banking.

Peter Fray

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