When central banks cut interest rates, borrowers expect their lenders to pass on these savings in the form of lower mortgage or loan repayments. In Australia, the Reserve Bank of Australia (RBA) often lowers the cash rate to stimulate the economy, but not all banks or lenders pass on the rate cut fully. The same situation happens in the United States when the Federal Reserve (Fed) lowers its benchmark rate.
If your lender fails to pass on a rate cut, you could be missing out on thousands of dollars in potential savings. That’s why experts—including regulators in countries like Australia—often encourage borrowers to switch lenders if their current one does not offer competitive rates after cuts.
In this guide, we’ll explain:
- How central bank rate cuts work
- Why lenders sometimes don’t pass on savings
- The risks of staying with such lenders
- Options for U.S. borrowers (rate negotiation, float-down, refinance, and switching lenders)
- Real U.S. examples and calculations to show potential savings
By the end, you’ll know exactly when it makes sense to switch lenders if rate cut is not passed on RBA—and how to do it smartly.
How Central Bank Rate Cuts Influence Borrowers
Central banks use rate cuts to lower borrowing costs across the economy. Here’s how it typically works:
- Federal Reserve lowers federal funds rate → reduces the cost of short-term lending between banks.
- Banks and lenders may reduce their own lending rates → mortgages, car loans, and personal loans may become cheaper.
- Borrowers benefit if lenders pass on savings → lower monthly payments free up cash for other expenses.
Example (U.S. context)
In March 2020, the Federal Reserve cut rates nearly to zero to support the economy. Mortgage rates followed and fell sharply. A borrower with a $300,000 loan at 4.5% interest could refinance to 3.5%, saving about $167 per month or $2,004 per year.
But not all lenders automatically reduce rates for existing borrowers. Some may delay or not pass on the full cut at all.
Why Lenders Don’t Always Pass on Rate Cuts
There are several reasons lenders may not reduce rates after a cut:
- Profit margins – Banks want to maintain earnings, so they may keep rates higher.
- Funding costs – Some lenders rely on wholesale funding or other sources that don’t adjust immediately.
- Market competition – If consumers don’t shop around, banks have less pressure to reduce rates.
- Customer inertia – Many borrowers stay loyal to their bank, even when better offers are available.
This is exactly why the RBA in Australia urges customers to consider switching lenders if their bank does not pass on cuts. U.S. borrowers should adopt the same mindset.
The Cost of Staying with a Non-Competitive Lender
Let’s look at a simple calculation to understand the cost.
- Loan amount: $300,000
- Remaining term: 25 years
- Current rate with your lender (no cut): 6.5%
- Market rate after a cut: 5.5%
Monthly payment at 6.5%:
= $2,027
Monthly payment at 5.5%:
= $1,839
Monthly savings if rate cut passed on: $188
Yearly savings missed: $2,256
Over 5 years: $11,280
That’s real money left on the table if your lender does not act.
What U.S. Borrowers Can Do
If your lender is not passing on savings after a Fed rate cut, here are your main options:
1. Negotiate a Rate Modification
Call your bank or mortgage servicer and ask for a lower rate. Some lenders may agree, especially credit unions or regional banks.
- Example: A borrower at 6.75% negotiates down to 6.0%. On a $250,000 loan, this saves about $119/month or $1,428/year without refinancing costs.
2. Use a Float-Down Option
If you are in the process of buying a home or refinancing, ask if your lender offers a float-down rate lock. For a small fee, you can secure today’s rate but benefit if rates fall before closing.
- Example: A buyer locks at 7.0% but rates fall to 6.5% before closing. On a $350,000 loan, that saves $114/month ($1,368/year). If the float-down fee is $1,000, you recover the cost in less than a year.
3. Refinance Your Loan
Refinancing replaces your current loan with a new one at a lower rate.
- Example: $400,000 loan at 7.0% refinanced to 6.0%
- Old payment: $2,661
- New payment: $2,398
- Monthly savings: $263
- Annual savings: $3,156
- Old payment: $2,661
Even after $3,000 in closing costs, you break even in under 1 year.
4. Switch Lenders
If your lender refuses to adjust, explore competitors. Online lenders, credit unions, and smaller banks may offer better deals. Comparison shopping is critical.
Also Check: Finance Tips and Tricks Build Your Wealth Through Debt
Step-By-Step Example: Refinance vs Staying
Imagine two borrowers, Alex and Maria, both with $300,000 left on their mortgages for 25 years:
- Alex stays with Bank A at 6.5% (no cut passed).
- Maria switches to Bank B at 5.5%.
Alex’s payment
= $2,027/month
Maria’s payment
= $1,839/month
Difference
= $188/month or $2,256/year
After 10 years, Maria saves $22,560 more than Alex.
Comparison of Options
| Option | Time to Benefit | Costs Involved | Effort Required | Risk Level | Best For |
| Rate Modification | Immediate | Minimal/None | Low (phone call) | Low | Loyal customers who want quick relief |
| Float-Down Option | Before closing | Small fee | Medium | Low | Buyers/refinancers locking rates |
| Refinancing | 1–2 months | Closing costs | Medium-High | Low | Borrowers with high balances & long terms |
| Switching Lenders | 1–2 months | Closing + app fees | High | Low-Med | Those with significant rate gaps |
When Switching Lenders Makes the Most Sense
Switching lenders is most beneficial when:
- The difference in rate is 0.75% or higher.
- You plan to stay in your home for at least 3–5 years.
- Your credit score and financial profile support approval.
- Competitors offer better terms with reasonable fees.
Break-Even Calculation
Suppose refinancing to a new lender costs $4,000.
- Monthly savings: $200
- Break-even time: $4,000 ÷ $200 = 20 months
If you plan to stay longer than 20 months, switching lenders is the smart move.
Tips for Borrowers in the U.S.
- Monitor rates closely after Fed announcements.
- Use online mortgage comparison tools to check competing offers.
- Check your credit score—better credit often means better rates.
- Ask about all fees upfront—appraisals, closing costs, and prepayment penalties.
- Don’t be afraid to negotiate—even a 0.25% reduction saves thousands over time.
Conclusion
If your lender doesn’t pass on savings after a central bank rate cut, you may be losing thousands of dollars each year. Whether it’s through negotiating a modification, using a float-down option, refinancing, or switching lenders entirely, you have multiple ways to make sure you benefit from lower rates.The key takeaway is simple: don’t stay passive. Just like the RBA tells Australians, U.S. borrowers should be proactive and willing to switch lenders if rate cut is not passed on. By staying informed, doing the math, and shopping around, you can protect your finances and maximize savings.
