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Record number of Aussies refinance as new home lending plummets
Today’s figures from the ABS show new home lending plunged $2.15 billion in May, the biggest monthly drop ever recorded.
How much could you pay for extending your mortgage freeze?
Australians experiencing financial hardship may welcome the news that the big banks are offering to extend mortgage holidays. But while this could provide welcome relief in the short term, what could freezing your mortgage for longer end up costing you in the longer term?
Whether you're planning to buy a home where you and your loved ones can live, or investing in property in hopes of a return, looking for a low interest home loan is a wise move. After all, the smaller your home loan repayments, the more affordable your loan will be, and the less of an impact it will make on your finances overall.
But a low interest rate isn’t the only factor to keep in mind when selecting or even making home loan comparisons. Whether you’re investing, planning to occupy a property, or even refinancing an existing mortgage, there are a range of other features to keep in mind when making your decision.
How important are low interest rates?
Mortgages with low interest rates are understandably popular among borrowers, as they involve paying less money to the lender on top of each instalment of the loan’s principal.
Some lenders offer heavily-discounted “Honeymoon Rates” for the early stage of a loan, which typically revert to standard variable interest rates once this introductory period expires.
On the surface, these may appear to be lowest interest home loan rates you can find, but if you don’t take this into account the introductory period caveat when planning your budget, you could find yourself paying much more than you initially expected.
It’s also important to remember that many lenders also charge fees with their mortgages, which can make a significant impact on the budget of a borrower. A mortgage with a low interest rate and high fees may ultimately turn out to be more expensive in total than a mortgage with a higher interest rate with lower fees and charges.
One way to get an idea of the relative costs of different home loans is to look at their Comparison Rates, which combine a lender's advertised interest rates with their standard fees and charges.
However, you should keep in mind that a loan’s comparison rate may not take its nonstandard fees and charges into account, or any bonus features offered by the lender that could add extra value to the loan.
Are you an investor?
Lenders offer different types of home loans to owner occupiers and to investors, to better suit the different financial positions of these property purchasers.
While there are always exceptions, home loans for owner occupiers tend to offer low interest rates that are lower on average than what is found in investment home loans. This is partially due to government regulations surrounding investment lending, and because lenders tend to consider investors to be greater financial risks than owner occupiers.
What are owner-occupied home loans?
Are you buying a home to live in or buying for investment purposes?
Fixed or variable interest rate?
Once you find a low interest rate home loan, you should be able to calculate the affordability of its repayments. But keep in mind that the mortgage’s low interest rate may not stay that low forever!
Many mortgages have variable interest rates, where the amount of interest the lender charges is affected by the national cash rate set by the Reserve Bank of Australia (RBA). If the RBA keeps the cash rate on hold, the amount of interest you pay should remain steady. If the cash rate is cut, your lender should pass the interest cut on to you, reducing your home loan repayments.
However, the RBA may also choose to increase the cash rate, which could lead to your interest payments becoming more expensive if your lender passes on this rate rise. A sustained period of regular rate rises could lead to your mortgage repayments growing much more expensive than what they were originally, potentially putting you at risk of mortgage stress.
Some lenders fix their mortgage interest rates for anywhere from one to twelve years. This can help to keep your repayments stable and comfortably affordable during the fixed period, which can prove especially valuable to first home buyers hoping to build up their initial equity. However, with one of these fixed rate home loans, you also won’t benefit from any savings if the RBA lowers the cash rate.
If you’re uncertain which home loan option best suits your finances, you may be able to choose a split rate home loan, which involves paying a fixed rate of interest on a percentage of your loan’s principal, and a variable rate on the remaining balance. A split rate home loan lets you enjoy some of the advantages of a variable rate mortgage, such as savings from rate cuts, while at the same time benefiting from the security of a fixed interest rate, which can help keep your repayments from getting too high if rates rise.
The fixed versus variable home loan debate
What's the difference between fixed and variable loans, and how will you choose?
Mortgage stress explained
You may know that borrowers can run the risk of mortgage stress if interest rates increase, but what is mortgage stress?
The definition of mortgage stress is when a household has to devote at least 30 per cent of its pre-tax income to servicing its mortgage.
Households that are coping reasonably well with their mortgage repayments can find themselves suffering mortgage stress if interest rates suddenly increase, or increase by a significant amount in a short period of time.
For example, between October 2009 and November 2010, the Reserve Bank of Australia increased the official cash rate by 1.50 percentage points. Imagine if you took out a home loan at, say, 4.50 per cent, and your lender then increased your interest rate by 1.50 percentage points over the next 13 months. Here’s what would happen if you had a 30-year loan for $350,000, $500,000, $650,000 or $800,000:
|Monthly repayments at 4.50%||$1,773||$2,533||$3,293||$4,053|
|Monthly repayments at 6.00%||$2,098||$2,998||$3,897||$4,796|
The great thing about a home loan calculator is that you can use it to research what would need to happen for you to fall into mortgage stress, and then plan accordingly.
Choosing your loan term
If you’re looking at low interest home loans to hopefully minimise how much interest you’ll pay on a property, then you may also want to consider the length of time that you’ll take to pay off your loan. Many mortgages start with terms of 25 or 30 years, though shorter and longer loan terms do exist.
By paying back your mortgage over a longer term, you’ll be making a larger number of repayments, each one for a smaller percentage of the principal. This can help to keep your repayments on the low side, so your mortgage remains more affordable from month to month. However, more repayments means more interest charges, so you may ultimately pay more in total interest over the longer loan term than if you’d opted for a shorter term.
A shorter loan term involves paying off your principal over a shorter period. Fewer repayments means fewer interest charges over the lifetime of the loan, so you can ultimately pay less interest on top of your loan’s principal. However, this does mean that each repayment will be for a larger percentage of your loan principal, making your mortgage less affordable from month to month.
How loan term affects home loan repayments
How much will you be paying? Find out on RateCity's Home Loan Calculator.
Most lenders require a certain amount of money up-front to serve as security when you apply for a home loan. This amount varies by lender, but around 20 per cent of the value is not uncommon. If you’re looking for a low interest rate home loan, you’ll likely need to pay the full deposit to help reduce the lender’s risk.
If you can’t afford a full deposit on the mortgage you’re looking at, there may be other options available to you.
Some lenders can offer a mortgage with a higher Loan to Value Ratio (LVR), where you pay a smaller deposit and borrow a greater percentage of the property’s value instead. However, for these options you’ll likely be required to pay the extra expense of Lender’s Mortgage Insurance (LMI) to help protect the lender in case you default on your repayments.
One option to avoid pricey LMI is a Guarantor loan, where a close relative guarantees your home loan with the equity in their own property in lieu of the full deposit. This option can prove risky for the guarantor though, so be sure they understand what’s involved first.
How much could LMI cost on a low interest home loan?
Use RateCity's Lender Mortgage Insurance calculator to work out your LMI.
Offset accounts and redraw facilities
A low interest rate on your home loan can help to keep your personal finances manageable, but some lenders also offer additional options that can be helpful in this area.
An offset account is a savings or transaction account that’s linked to your home loan. Any money paid into this account is included when the lender calculates its interest charges, which can help you save some money.
Example: If you’ve paid back $200,000 of a $500,000 home loan, and have $15,000 in your offset account, your interest repayments will be calculated on a remaining balance of $285,000 rather than $300,000.
A redraw facility will allow you to withdraw surplus money from your mortgage, provided you’re ahead on your repayments. This can allow you to confidently make extra payments onto your home loan, without worrying about finding yourself short on funds in case of emergency.
Even if you never use the redraw facility, paying extra money onto your home loan will bring you closer to paying it off ahead of schedule and potentially saving money in interest payments.
How does a guarantor loan work?
Do you have a child looking for a home loan? Going guarantor could help them. Find out how.
Do banks or non-banks offer the lowest interest rates?
When looking at interest rates on their own, in many cases non-bank lenders will make lower offers than the banks to stay competitive. And as these lenders are often smaller organisations than the big banks, they may be able to offer more personalised services to their customers, or possibly offer more flexible lending criteria to better suit a wider range of borrowers.
However, just because a mortgage has a low interest rate doesn’t mean it will necessarily offer the greatest value.
It's often good to keep in mind that while the lowest home loan interest rates can be offered by any lender, a low interest home loan that works best for you will likely be better for your needs in the long term.
Larger banks are often able to offer full home loan packages, bundling the bank’s full range of services (transaction/savings accounts, credit cards etc.) along with the mortgage. Plus, with most banks you’ll have the option to visit a branch to talk over your home loan, which may not be possible with some online-only lenders.
Compare low interest mortgages
When choosing a home loan to suit your unique financial situation, low interest rates are just one of many available factors to consider. To make your low interest rate mortgage comparison process easier and more efficient, RateCity collects the essential information regarding a wide variety of home loans all in one place, allowing you to quickly narrow down your shortlist of preferred lenders.
By using RateCity's home loan comparison system to help you save time and effort on your home loan search, you can invest more of your energy into working out which loan options will provide features and benefits that will best suit your finances and your lifestyle, all while enjoying affordable repayments offered by low interest rates.
The comparison rate is a more inclusive way of comparing home loans that factors in not only on the interest rate but also the majority of upfront and ongoing charges that add to the total cost of a home loan.
The rate is calculated using an industry-wide formula based on a $150,000 loan over a 25-year period and includes things like revert rates after an introductory or fixed rate period, application fees and monthly account keeping fees.
In Australia, all lenders are required by law to publish the comparison rate alongside their advertised rate so people can compare products easily.
It’s no longer possible to get a no-deposit home loan in Australia. In some circumstances, you might be able to take out a mortgage with a 5 per cent deposit – but before you do so, it’s important to weigh up the pros and cons.
The big advantage of borrowing 95 per cent (also known as a 95 per cent home loan) is that you get to buy your property sooner. That may be particularly important if you plan to purchase in a rising market, where prices are increasing faster than you can accumulate savings.
But 95 per cent home loans also have disadvantages. First, the 95 per cent home loan market is relatively small, so you’ll have fewer options to choose from. Second, you’ll probably have to pay LMI (lender’s mortgage insurance). Third, you’ll probably be charged a higher interest rate. Fourth, the more you borrow, the more you’ll ultimately have to pay in interest. Fifth, if your property declines in value, your mortgage might end up being worth more than your home.
A low-deposit home loan is a mortgage where you need to borrow more than 80 per cent of the purchase price – in other words, your deposit is less than 20 per cent of the purchase price.
For example, if you want to buy a $500,000 property, you’ll need a low-deposit home loan if your deposit is less than $100,000 and therefore you need to borrow more than $400,000.
As a general rule, you’ll need to pay LMI (lender’s mortgage insurance) if you take out a low-deposit home loan. You can use this LMI calculator to estimate your LMI payment.
Work out your mortgage repayments using a home loan calculator that takes into account your deposit size, property value and interest rate. This is divided by the loan term you choose (for example, there are 360 months in a 30-year mortgage) to determine the monthly repayments over this time frame.
Over the course of your loan, your monthly repayment amount will be affected by changes to your interest rate, plus any circumstances where you opt to pay interest-only for a period of time, instead of principal and interest.
Mortgage stress is when you don’t have enough income to comfortably meet your monthly mortgage repayments and maintain your lifestyle. Many experts believe that mortgage stress starts when you are spending 30 per cent or more of your pre-tax income on mortgage repayments.
Mortgage stress can lead to people defaulting on their loans which can have serious long term repercussions.
The best way to avoid mortgage stress is to include at least a 2 – 3 per cent buffer in your estimated monthly repayments. If you could still make your monthly repayments comfortably at a rate of up to 8 or 9 per cent then you should be in good position to meet your obligations. If you think that a rate rise would leave you at a risk of defaulting on your loan, consider borrowing less money.
If you do find yourself in mortgage stress, talk to your bank about ways to potentially reduce your mortgage burden. Contacting a financial counsellor can also be a good idea. You can locate a free counselling service in your state by calling the national hotline: 1800 007 007 or visiting www.financialcounsellingaustralia.org.au.
Property Personal Finance Writer
A property and personal finance writer, Nick Bendel covers property, loans, credit cards, superannuation, and other bank products. Nick has previously written for The Adviser, Mortgage Business, Lifehacker, Business Insider, Yahoo Finance, and InvestorDaily, and loves getting elbow-deep in the latest ABS, APRA and RBA data.