Three of  the nation’s big four banks have declined to pass on the full rate cut of 0.25% – and the fourth hasn’t yet passed on anything – following the Reserve Bank’s (RBA) announcement to cut the official interest rate last week.

The Commonwealth Bank of Australia (ASX: CBA) and National Australia Bank (ASX: NAB) cut their standard variable mortgage rates by 0.2% while Westpac Banking Corporation (ASX: WBC) dropped  by 0.18%. Australia and New Zealand Banking Group (ASX: ANZ) recently opted to move away from rate decisions based on RBA announcements, deciding to review their rates on a monthly basis. ANZ is expected to revise their mortgage rate this Friday (12th October).

NAB’s mortgage rate is now 6.58%, CBA is 6.6% and Westpac’s mortgage rate is the most expensive at 6.71%. ANZ’s current variable mortgage rate is 6.8% and a 0.2% cut on Friday would bring it into line with CBA and NAB.

Many home loan borrowers can receive lower rates than this by taking out packages with the banks, or look at products offered by building societies and credit unions. ANZ, for example, offer a discount off the mortgage rate of up to 0.8%, if customers take an ANZ credit card and bank account bundled with a mortgage. The other banks offer similar packages. St George even offer a discount of up to 0.9% for loans of $500,000 or more with their Advantage Package.

Some smaller lenders offer mortgages with interest rates more than 1% lower than the big banks.

The big four banks have repeatedly stated that their funding and other costs are increasingly less reliant on the RBA’s official interest rate and therefore they can’t always pass on the full rate cut. Australian banks get a high percentage of their funding from overseas wholesale markets, while increasing competition for high interest rates on deposits pushes up their expenses.

Banks earn the majority of their income from the margin between lending and deposit rates (known as the net interest margin), and the levels of those rates are all important for them to make a profit.

The Foolish bottom line

As the Federal Treasurer, Wayne Swan, has suggested, it pays for you to shop around. While the process of changing lenders is still not simple or easy, even a 0.1% discount can save consumers thousands of dollars over the term of a home loan. I’m in the process of doing that now for my own personal situation.

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Motley Fool writer/analyst Mike King doesn’t own shares in any stocks mentioned. The Motley Fool’s purpose is to help the world invest, better. Take Stock is The Motley Fool’s free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. Click here now to request your free subscription, whilst it’s still available. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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