What happens to locked in rates when interest rates fall?

A

aussieB

Hello,

I am awaiting settlement on our PPOR. CUA has given unconditional approval and everything is in place - just waiting for the settlement.
Now that there is news that there will be rate cuts tomorrow, I am a bit worried. Last time I spoke to my mortgage broker about this possibility I was told "You are locked in mate. That means you also wont pay if the rates rise". I think this is misleading information that I am being provided.

If there are rate cuts announced by CUA, am I still bound by what I had opted for initially (even though I haven't settled yet) ? Don't the banks automatically pass on the new rates to fixed rate loan contracts (yet to be enforced) ?
In my circumstances, what can I do if the interest rates are reduced ?

Cheers,
 
You will need to find out specificicall what CUA will do, but some banks will pass on any reduction to fixed rates if they happen before settlement, as they will increases unless you have a specific 'rate lock' fee or similar.

Note, just because variable rates may change tomorrow when the RBA meets, doesnt mean banks will change thier fixed rates tomorrow. They may, or they may not, fixed rates are changed all the time, and dont act in unision, or with any correlation with the RBA rate.
 
In the context of "Locked in" it would appear that you've got a rate lock feature in place.

I'm not sure of CUAs specific policy on this, but if rates increase, this means you get the rate when you locked in. If rates decrease, some lenders will pass on the decrease, others will leave you at the rate when you locked in.

This is all assuming that the fixed rates change. The RBAs decision tomorrow may be an indicator, but it's not a guarantee of what fixed rates will do.

Why did you fix in the first place? If it's to mitigate against rates increasing, then be happy knowing that you're covered. If it's to save money, then you've taken a gamble on the market and you'll have to live with that.
 
Bear in mind that if the RBA cuts rates tomorrow they only change the cash rate. Banks will independently change their variable rate for mortgages. Don't expect a 25pt cut if RBA cuts 25 pts!!

Variable rates and fixed rates move independently but can be related. A 25pt cut tomorrow wont change fixed rates at all. Fixed rates take a different view of the economy and look into the 3-5 year range and move independently for other factors.
 
Peter_Tersteeg said:
some lenders will pass on the decrease, others will leave you at the rate when you locked in.
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A very important factor that some borrowers don't realise.

Not all banks pass on the rate reduction (if fixed rates drop) if you locked in between application submission and settlement.

Cheers

Jamie
 
Fixed rate funding costs have been falling dramatically since December but the banks have not lowered most of their fixed rates. If fixed loan rates followed the swap rates they would be down 50bps now.

Retail prices for fixed rates depend on competition and market demand. If one of the Big 4 starts lowering fixed rates the others can afford to follow. In the meantime they are happy to keep the higher margin, waiting for gullible/uninformed borrowers to bite.

In the current market it would be questionable to get fixed rates. You only go fixed if you are confident the economy is expected to grow near/above trend and/or if there is a huge threat of inflation, which will force the RBA to raise rates and maintain it in the fixed period contemplated.

At the moment we have the opposite -- economic growth is below trend and inflation is subdued. There's no convincing reason to take fixed rate loans at the present time or perhaps in the near future.
 
aussieB said:
I did not opt to be locked in. There is a fee that CUA charges for locked in rates so I am 100% I never asked for it.
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My personal suggestion would be for you to ask it to be turned to full variable, now that settlement has not taken place, if that is possible.
 
unloadmymind said:
My personal suggestion would be for you to ask it to be turned to full variable, now that settlement has not taken place, if that is possible.
Click to expand...

Most likely requiring a rework at credit for a new approval, new docs sent out and returned. Meanwhile CUA would put up fixed rates if they so wish - then how will aussieb feel?

Fixed rates are just that, wanting all the downward rate movements without any upward rate risk is magic pudding.
 
z611143 said:
What happens if the RBA drops the rate 25 points and the loan is variable, do the banks have to follow this?
Click to expand...

They don't have to follow it at all, they can put their rates up 1% at the same time if they so wish.

More and more over time the lenders have been transitioning to dance to their own tune, than the whims of the RBA.
 
Corey Batt said:
They don't have to follow it at all, they can put their rates up 1% at the same time if they so wish.

More and more over time the lenders have been transitioning to dance to their own tune, than the whims of the RBA.
Click to expand...

More than likely you'll see a similar drop in variable rates from lenders. It may not be the full amount, but given current credit conditions and competitive marketplace, its unlikely they won't pass on the majority of it.

Cheers,
Redom
 
Redom said:
More than likely you'll see a similar drop in variable rates from lenders. It may not be the full amount, but given current credit conditions and competitive marketplace, its unlikely they won't pass on the majority of it.

Cheers,
Redom
Click to expand...

No doubt, enough lenders have shown their cost of funds are *cheap* right now so they still have sufficient margin to keep dropping.
 
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