The Reserve Bank of Australia’s recent decision to cut the official cash rate by 0.25 percentage points to 3.6% has brought much-needed relief to homeowners burdened by high mortgage repayments. However, while many mortgage holders are eager to feel the effects, the immediate financial relief may not be as quick as anticipated.
Despite the interest rate decrease, borrowers may face delays in seeing reduced repayments due to the way mortgage interest is calculated and repayment cycles are structured. The timing of the next billing cycle will determine when the savings become apparent, meaning many homeowners could be waiting several weeks before noticing any changes.
Impact of the Rate Cut on Mortgage Repayments
According to money.com.au, the key to understanding when repayments will decrease lies in the billing cycle. Although the rate cut came into effect on August 12, mortgage repayments may not be updated until the start of a borrower’s next billing cycle. For example, if a borrower’s billing cycle starts on the 15th of the month, their lower repayments will only take effect on September 15. This delay is because most lenders calculate mortgage interest daily but charge it monthly in arrears.
Mortgage interest is based on the loan balance and the interest rate applied over the past 30 days. This means that, even if a rate cut is passed on by the bank, the adjustment won’t be reflected in the repayment until the next cycle. As a result, many borrowers may not see an immediate drop in the amount they owe.
Understanding Your Mortgage Billing Cycle
It’s important for homeowners to understand how their specific mortgage billing cycle works, as it will determine when any changes in repayment amounts take effect. Mortgage billing cycles are usually tied to the date the loan was settled. For example, if the loan was settled on the 15th of the month, repayments will likely be scheduled on a monthly basis starting on the 15th of each subsequent month.
Even if homeowners make repayments weekly or fortnightly, their lenders typically track interest and repayment schedules according to the monthly cycle. As a result, rate cuts, while beneficial, may not immediately show up in their repayment schedules.
Who Benefits from the Rate Cut?
The August rate cut will provide some financial relief, particularly for those with larger mortgages. For instance, a borrower with a $600,000 mortgage could save approximately $90 per month from this latest cut, adding to the total savings of $273 per month since the RBA began lowering rates. For a $1 million mortgage, the cut alone will reduce repayments by $150 per month, bringing the total savings to $456.
While these savings are welcome, it’s crucial to remember that they may not be reflected in repayment amounts right away. Homeowners should consult their lender for clarification on when the rate cut will take effect in their specific case.
