Homeowners ignore rate cuts

Majority of borrowers making repayments at 2011 levels despite the RBA cutting the cash rate by 2%

Mike King

Mike King is a Fool.com.au Investment Analyst and Writer. He caught the investing bug more than a decade ago, at a time when the U.S. had invaded Iraq and fear reigned in the markets. His initial success as the markets took off encouraged his passion and thirst for knowledge. With 13 years behind him at one of Australia's largest domestic banks, Mike's passion for stocks led him to join a boutique funds management firm, where he stayed for four years. A seven-year stint in equity research at one of the largest investment banks in the world followed that, giving Mike a thirst to pursue his passion further. Mike holds a Diploma in Applied Finance and Investment and a Graduate Certificate in Financial Planning. His passion is to help retail investors invest better, and that passion was one of his primary reasons for joining The Motley Fool Australia in late 2011. Mike has written thousands of articles since joining, including for Fairfax Media, Yahoo!7, Ninemsn and has also appeared on ABC's The Business. You can see all of Mikes' holdings here

Published June 24, 2013 3:11 pm AEST

Homeowners are keeping up their repayments at levels from two years ago, despite the RBA cutting the cash rate by 2.0% since November 2011.

Instead of cutting their repayments to the minimum required, mortgage holders have continued to make repayments based on higher interest rates. As a result, several economic factors have not moved as expected.

Generally, as interest rates fall, consumers have in the past opted to lower their mortgage repayments and utilise the extra cash to invest or shop. According to AMP Limited (ASX:AMP) economist Shane Oliver, Australia has seen a very muted response to interest rate cuts. As a result, retail sales, consumer confidence and housing approvals have not improved as they would have been expected to.

It seems homeowners are instead building up a war chest in the event of further economic downturns. According to news.com.au when a lender reduces its variable rates in response to an RBA cut, the lender only lowers repayments when asked by customers.

The Greater Building Society, which is one of the largest in the country, has reported that at least 90% of customers haven't asked to have their repayments reduced. The nation's largest home lender, Commonwealth Bank (ASX:CBA) says that 65-70% of home loan customers have not reduced their repayments since 2011. That means the vast majority of mortgage borrowers are still making repayments at 2011 levels, when the official cash rate was 4.75%.

To confirm the data, RBA data suggests that homeowners are about $160 billion ahead on their mortgages, saving an extra $30 billion since the start of the global financial crisis. Had they reduced their repayments to the minimum required, much of that $30 billion would have likely flowed into retailers' coffers. Building materials companies such as Boral Limited (ASX:BLD) and CSR Limited (ASX:CSR) would also have seen some of it, as homeowners invested some of the extra cash in investment properties.

Foolish takeaway

Despite predictions the RBA will cut rates even further, the falling share market and Australian dollar may see mortgage holders continue to make repayments at 2011 levels, a sobering outlook for our retailers.

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Motley Fool writer/analyst Mike King doesn't own shares in any companies mentioned.

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