Make my day, Bank

Bruce Brammall, The West Australian, 9 November, 2020

Couldn’t help but think of one of Dirty Harry’s most famous lines when the Reserve Bank cut interest rates last week.

As the wounded bank robber lay on the street, deciding whether or not to reach for his gun, he couldn’t remember whether Harry Callahan had one last bullet in the chamber of his Magnum six-shooter.

“I know what you’re thinking. ‘Did he fire six shots, or only five?’” Harry said, calmly.

Harry had run out of bullets. And now, clearly, so has the RBA. They fired the interest rate gun last week, as we were all “getting on the beers” ahead of the Melbourne Cup.

But we just got the empty click of a revolver out of ammo.

No major bank passed on last week’s rate cut of 15 basis points, from 0.25 per cent down to 0.1 per cent. Most cut their fixed rates, but only a few second-tier banks dropped their standard variable rate.

Don’t get me wrong. I’m not saying that “nothing happened”. Something did happen.

It’s just, dear homeowner, that nothing will happen to you this time around without you doing something for yourself.

There are a few options.

Usually, when the RBA fires its weapon, interest rates on all home loans move. We’re either going to be paying less (or more) on our mortgage each month.

But this time banks only moved for only one type of loan – fixed rates – which most of us don’t have.

So, one way of benefitting from this most recent rate cut, would be to fix your rates. That’s not going to suit everyone.

While I certainly like the sound of some of these fixed rates for up to four years at below 2 per cent, I’m not pulling the trigger just yet.

Fixed rates are a different ball game. For a home buyer, they lack flexibility. They lock you in. They generally don’t allow offset accounts to work their magic. And there can be penalties if you need/want to get out.

This tends to be why most Australians stick with standard variable rates. You can pay early, the offset account works best for your savings and if you decide that you’ve truly had enough of your bank, it’s pretty easy and cheap to move.

But fixed rates are now getting awfully appealing.

Instead of paying a variable rate of 3 per cent, you could lock in around 2 per cent.

On a $500,000 home loan over 30 years, that would cut your home loan repayments from $2108 to $1848. A saving of $260 a month, $3120 a year, or $9360 if you took a three-year term (assuming rates don’t move again).

A second option is to hold a gun to your bank’s head – threaten to walk out the door. Overall credit growth is currently low, so banks are fighting harder to retain business.

The discounts you might be offered to stay with your bank are getting bigger. You might find that you can squeeze another 0.2 per cent out of them to stay with them, simply by asking.

Thirdly, you can switch lenders. (This might be the bullet you fire if you fail to negotiate a better deal with your own bank.)

It’s these two options that RBA Governor Phillip Lowe is encouraging borrowers to do.

“I encourage everybody to ask their bank for a better deal,” he said last week, after firing his bullet-less gun.

“If they don’t give you a better deal after today’s decision, ask them, and if they still don’t give one to you, switch to a bank that will.”

Do you want to know how banks make their easiest money? From people who take out a loan with them, then happily sit there and pay off their loan over 30 years, never complaining, or asking for a better deal. There are still some borrowers out there paying above 4 per cent. Seriously.

Who gets the good oil? The squeaky wheel, of course. And if you’re not happy with the rate that you’re paying, it’s up to you to either challenge your bank to a force their hand, or get a mortgage broker to guide you across the road to a lender who will.

For now, the RBA is out of ammo. You’ll have to arm yourself. You’ve actually got a Magnum. You just need to wave it around like it’s actually loaded.

Bruce Brammall is the author of Mortgages Made Easy and is both a financial adviser and mortgage broker. E: bruce@brucebrammallfinancial.com.au.