Rate cut rort: How banks keep you trapped with interest rate sneakiness
Banks on average pay less interest to savers and give borrowers a smaller discount after the RBA cuts interest rates.
A Finder analysis of interest rate data shows that banks and lenders profit from RBA cash rate cuts by making bigger cuts to savings rates and smaller cuts to home loans.
Data from the last cycle of rate cuts (2019 to 2022) shows that, on average, banks pass on most of a rate cut to customers at the start of a rate cut cycle.
But over time, banks make even bigger cuts to savings rates, outpacing the RBA's cuts to the cash rate.
This means customers earn less interest on their savings. At the same time, banks lower their variable home loan rates by fewer basis points compared to the cash rate cut.
In other words, savers feel the full effect of a rate cut while borrowers, who benefit from lower rates, don't.
Here's what the data says:
- From May 2019 to January 2022 the cash rate fell by 140 basis points.
- Over the same time, banks cut savings rates by 190 basis points.
- Home loan rates only fell by 123 basis points on average.
- That's a gap of 67 basis points.
There's a really important lesson here: banks make money from taking customer deposits and lending them out, with interest. That's banking 101.
And by cutting savings rates more than home loan rates, they make a little more per customer.
There's another lesson too: Banks are more generous in passing on rate cuts when the public is paying attention. At the start of a rate cut cycle.
But as time goes on they get a bit stingier with the home loan rate discounts.
And where are we today? Australian borrowers cheered last week as the Reserve Bank cut the official cash rate for the first time since 2020.
Within days, over 50 lenders had announced they were cutting variable rate loans by the full 25 basis points.
Banks are taking a bit longer to announce cuts to savings rates. But we can expect them to cut soon. Announcing a home loan rate cut is good news, so they keep the savings cuts quiet.
So if the RBA cuts rates again later this year, the data suggests banks will pass on less of the rate cut to borrowers. While lowering savings rates by the full amount, or even more.
That's their business, after all. And that's why borrowers and savers need to compare and switch whenever they can find a better deal.
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