Why homeowners are ignoring the RBA

Rate cuts ignored ... Reserve Bank of Australia Governor Glenn Stevens. Picture: Gary Ramage Source: News Limited

MORE than 90 per cent of some lenders' mortgage customers have not reduced their repayments since 2011 when the RBA began the process of slashing the cash rate to the lowest level ever.

This is significant in explaining why those cuts have failed to stimulate the economy.

"We have seen a very muted response so far to interest rate cuts," said AMP chief economist Shane Oliver.

Retail sales, consumer confidence and housing approvals had not improved in the way that would have been expected, Dr Oliver said.

This is in part because homeowners have chosen to not spend the extra cash that becomes available to them when their minimum mortgage repayment falls.

Instead they are maintaining their repayments, building up a war chest in the event of further economic turmoil.

"They don't adjust as the rate goes down," Dr Oliver said. "They are still paying the same dollar amount."

Typically when a lender reduces its variable rates in response to an RBA cut, the lender will not reduce a mortgage customer's repayments - unless the customer asks.

The Greater Building Society, one of the largest in the country, says that at least nine in 10 home loan customers haven't asked.

That means they are still repaying the same amount as they were in 2011, when the Reserve Bank of Australia began a series of cuts that has reduced its benchmark rate from 4.75 per cent to 2.75 per cent.

"The level of confidence in the Australian community at the moment is really, really flighty," said Greater CEO Don Magin, whose building society provides mortgages to about 40,000 households.

A spokesman for market no.1 CBA said 65 to 70 per cent of its variable-rate customers "have not reduced their repayments" since 2011.

A homeowner with a $300,000 mortgage who chose to not lower repayments in response to the RBA cuts is on their way to clearing their loan five years ahead of time, saving more than $80,000 in interest, according to Canstar.

RBA data suggests homeowners are about $160 billion ahead on their mortgages, squirrelling away an extra $30 billion since the start of the global financial crisis.

AMP's Dr Oliver said other factors muting the effect of the RBA cuts were:

- LENDERS' failure to pass on the reductions in full to their variable home loan rates;

- MANY borrowers are on uncompetitive rates and have not sought out a better deal; and

- OFFICIAL cuts came too late.

"The Reserve Bank fell asleep at the wheel" in the first four months of 2012, Dr Oliver said.

Economists at CommSec and ANZ say that the RBA still has a "bias" towards cutting the cash rate again, but if that happens it won't be until August. And there is less likelihood of a further cut if the Australian dollar keeps falling, they say.

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