Rate cut welcome, but not enough

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As expected, the Reserve Bank of Australia (RBA) lowered the official interest rate by 0.25% to 7% during its September meeting. What followed -all major banks matching the rate change - was perhaps a greater surprise and more important news for homeowners with a mortgage.

The rate cut was expected to save borrowers $57 per month, based on a 30-year home loan of $300,000 with a 9.35% annual interest rate.

In a successful publicity-grab on the weekend, Wizard Home Loans jumped to be the first lender to cut its home loan rate since 2001, beating the RBA announcement by a few days. The non-bank lender cut its rate by 0.25%, dropping from 9.54% to 9.24%. That put it below the variable rate of the big banks, though not all lenders.

"The banks have been slowly increasing their profit margins, but this will bring them back in line," said Wizard chairman Mark Bouris.

It is likely the central bank's cut had the greatest influence, though.

The four major national banks - ANZ, Commonwealth Bank, NAB and Westpac - all announced on Tuesday that they would meet the RBA's rate decrease within a few days, matching the 0.25 percentage points. But those mark-downs were still not near the greater-than 0.55% increase the banks have independently given to interest rates since January.

Some experts did not think the RBA went far enough.

"Leading indicators of residential construction have remained unequivocally weak in the first month of the new financial year," said Harley Dale, chief economist of the Housing Industry Association. "A larger reduction in rates was required to ensure the massive shortfall in Australia's housing stock begins to turn around as soon as possible."

Shane Oliver, chief economist at AMP Capital Investors, agreed more cuts were needed, but he expected them to be on the way. "One rate cut won't see a sustained improvement in the economy or shares, but it's going in the right direction," he said.

That might not make a major difference for all homeowners, but the move was seen by many as a significant spark to increase competition between lenders again, after 12 consecutive rate rises by the RBA.

"This is very encouraging news for borrowers," said Phil Naylor, CEO of the MFAA. "The competitive forces in the lending market will now determine how quickly borrowers receive the benefit of this announcement from individual lenders."

Naylor said the previous rate rises worked, but it was time from the RBA to step back. "A slump in consumer confidence, with a decrease in construction and overall retail spending, shows that the RBA's strategy to slow the economy has worked," he said. "The Reserve has now obviously seen it appropriate to slightly loosen its grip."

Mortgage House, one of the lenders to match the 25% decrease, said it would "no doubt ease the burden of mortgage stress significantly".

Of Wizard's jumping the gun in lowering interest rates, Lisa Montgomery, head of marketing and consumer advocacy at Resi - another non-bank lender - said it was a positive step by Wizard, especially since it gained so much publicity.

"The message to consumers is that there is a choice for your home loan provider," Montgomery said. "In that vein, [Wizard's reduction] is a great move for the non-bank lending community. And what it will do ultimately is create more opportunities for borrowers."

The pressure may be on banks again, as there is speculation in the media already that there will be further rate cuts by the central bank this year.

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