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

low interest rates

A question we’ve been getting a bit lately has been, ‘why didn’t my lender reduce my repayments when interest rates fell last year?’

It’s not just a question our clients have been asking either, with the matter discussed at length in the House of Representatives last November.


What happens to loan repayments when the interest rate falls?

If you’re making Principal & Interest repayments on your loan and your lender announces an interest rate drop, nothing generally happens to your loan repayments – for a while at least anyway.

Your minimum monthly repayment stays the same but since you’re now charged less interest, each repayment consists of a higher proportion of principal.


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

Lenders do adjust your principal and interest repayment to reflect the new interest rate, but it doesn’t usually happen right away.

It’s dependent on the lender, but generally speaking a lender conducts a repayment review across all their loans one or twice a year. Following this review, the lender will re-calibrate the repayments given current rates.

If you’ve opted to make a specific repayment higher than the minimum each month, your repayment doesn’t change as a result of the review. You’ll just continue to get even further ahead on your loan, if rates have fallen.

When ANZ CEO Shayne Elliot was questioned as to why lenders keep repayments the same in a Parliamentary hearing last Nov, he said is was in the customer’s best interest because it helped them repay their loan quicker.

The logic being that, if a borrower has the capacity to meet the higher loan repayments, they should continue to do so because it ultimately helps to reduce debt faster.


What if you want your repayments to be lowered straight away? Or you wanted to direct funds into one loan particularly to pay that one off faster?

You can request for your lender to re-calculate repayments based on the lower interest rate, as soon as the new rate becomes effective.

According to Shayne Elliot though, only 7% of ANZ home loan holders opted to reduce their repayments off the back of the interest rate cuts last year.

Perhaps this is because borrowers don’t know they can choose to re-calibrate their repayments. Or perhaps it’s because borrowers want to pay down their home loans faster.

(We like to think it’s the latter!)


March 2020 Edit:  We know it’s not always possible to actively get ahead on your home loan – especially in times of uncertainty. 

If you want to lower your monthly commitments so you’re paying a lower minimum monthly repayment amount (one based on your new lower interest rate), you need to arrange this directly with your lender. Often it involves a call to their support line, often you can do it via online banking.


Want to reduce *your* home loan repayments even further?

If you want to reduce your home loan repayments AND your interest rate, it might be time to book in for a home loan review with our team.

We’ve been helping lots of clients find competitive rates with new lenders (as well as secure attractive refinance cash backs) over the last month.

You can find out more about our Home Loan Review service here.

Or, if you’re keen to save some money this year – rather than continually putting it off – you can get things started here.


March 2020 Edit:  You may think that with COVID-19, lenders aren’t open for business. It’s actually quite the opposite. Yes, there may be some delays with processing. But lenders are definitely still lending and we’re most definitely still keen to help you save money on your home loans.


*This post was published on 30 January 2020

Read more here: https://www.mortgagebusiness.com.au/breaking-news/14007-opinion-should-banks-automatically-adjust-repayments

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