Lenders favour borrowers who take on more debt

Lenders are heavily discounting mortgage rates for their “affluent customers” slashing more than 40 basis points off average variable rates for those borrowing in excess of $750,000, compared with the average mum-and-dad borrower, new research shows.

A RateCity analysis of mortgage rates has revealed that the average advertised rate for variable home loans under $250,000 is 5.74 percent. For loans above $750,000, however, the average advertised rate drops to 5.32 percent – an automatic discount of 0.42 percentage points.

The most common home loan size, according to the Australian Bureau of Statistics, is approximately $300,000, which suggests many Australian families may be missing out on some of the best rates unless they shop around.

Michelle Hutchison, spokeswoman for RateCity, said there is greater incentive for institutions to lend larger sums to those who can service bigger loans because the larger the loan size, the more money there is to be made.

“Just as if you were to visit a supermarket to buy a bottle of soft drink, the bigger the bottle you purchase the less you pay per litre of the sugary drink,” she said.

“In much the same way, a lender is willing to accept a lower rate per dollar when selling a larger amount of money. A lender makes the majority of their money based on the margin between what the money costs them, and what they charge the customer.”

Because of this, she says, the lender can afford to offer a lower rate on larger loan sizes, but still earn enough to cover the fixed costs of providing and servicing the loan, such as admin costs for setting up a new loans, for example.

Hutchison said these discounts are fine for big borrowers, but should not be an incentive to borrow more.

“Just like the bottle of soft drink, bigger isn’t always better when it comes to borrowing and you shouldn’t take on more just to get a discount,” she said.

“By shopping around and comparing home loans, a borrower seeking a smaller-sized loan can access more attractive rates that are in line with some of the best deals available to those taking on seven-figure home loans.”

The RateCity database shows rates from 4.74 percent from State Custodians and 4.75 percent from loans.com.au available for loan sizes starting at just $100,000 and $50,000 respectively.

Another kind of discount for savers

Institutions are also rewarding savers with the best available home loan rates, the RateCity study has found.

They do this using a mechanism know as loan-to-value ratio (LVR), which in simple terms is the amount a lender will let you borrower compared to the value of the property.

The higher the LVR (closer to 100 percent), the smaller the deposit required in order to qualify for the loan.

“In recent years we have seen an increase in another type of discount – lower rates for lower LVRs,” she said. “These are a great incentive for borrowers to save a bigger deposit.”

RateCity shows that the average advertised rate for an LVR of 75 percent – or a 25 percent deposit – is 5.11 percent, while for those looking to borrow 100 percent, you can expect to pay 6.37 percent.

“By providing a bigger deposit, you are deemed as a safer borrower, and safety is another very attractive borrower trait. The best part is, saving for a bigger deposit can negate the need for lender’s mortgage insurance and reduces your overall interest cost – two things that borrowing more to get a discount never will.”

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