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Australia’s lowest 2-year fixed rate now comes with $3K+ cashback

Australia’s lowest 2-year fixed rate now comes with $3K+ cashback

Home loan cashback deals are heating up again, with international bank, HSBC, today offering a $3,288 cashback to refinancers on its fixed and variable rate loans.

Although this isn’t the largest cash incentive on the market, the deal is available on the bank’s 1.88 per cent two-year fixed home loan, which is currently the equal lowest two-year rate in Australia for owner-occupiers paying principal and interest.

Out of the 25 lenders offering cashback, this is the lowest rate loan.

Crunching the numbers – are cashbacks worth it?

RateCity.com.au has compared the 2-year fixed rate cashback deals from the big four banks and HSBC against the lowest variable rate on the market. The calculations consider interest, fees and cashback.

After two years, the average refinancer would be $2,715 better off on HSBC’s 2-year fixed rate than if they had opted for the lowest variable rate loan in the market of 1.79 per cent.

Westpac and ANZ’s 2-year fixed rate cashback deals also leave the average refinancer ahead after two years.

However, after the fixed rate term expires, these customers could find themselves behind, if they don’t refix or refinance their loan.

Cashback deals on a 2-year fixed rate vs lowest variable rate

Based on an owner-occupier with a $400K loan balance.

Hsbc table.PNG

Analysis of cashback loans on the RateCity.com.au database:

  • 25 lenders offering cashback deals.
  • In February 2020, there were just 12 lenders offering cashback.
  • Most cashbacks range between $1,500 and $4,000 (see list below). Note: Reduce is offering $5,000 cashback for home loans of $1+ million.
  • All big four banks are offering cashback deals (ANZ through a broker).
  • Most cashbacks are for refinancers only.

RateCity.com.au research director, Sally Tindall, said HSBC is in hot pursuit of refinancers who are also looking for a cash perk.

“This is the lowest rate loan in our database that also offers a cashback,” she said.

“While the average refinancer is likely to come out ahead in the first two years when compared to the lowest variable loan, anyone who forgets to refix or refinance at the end of the fixed term will end up on a revert rate of 2.54 per cent.

“Cashbacks are booming. There are 25 lenders offering up to $5,000 to help bring in new customers.

“Previously, the upfront sugar hit of cold hard cash was usually a dud deal because the loans often had non-competitive rates. These days banks are increasingly offering both low rates and cash – making them a far more attractive proposition in the short-term.

“People who refinance regularly and know how to drive a hard bargain on rates and fees could end up ahead on a cashback deal. However, anyone who sets and forgets their loan might be better off on a low ongoing variable rate.

“Don’t get lured down a cashback rabbit hole without thinking it through properly. Take a step back and make sure the loan suits your finances, otherwise you could be shooting yourself in the foot,” she said.

Highest refinance cashback home loan offers on RateCity.com.au

LenderCashbackLowest variable rateLowest 2-yr fixed rate
St.George Bank/Bank of Melbourne

$4,000

2.49%

1.99%

BankSA

$4,000

2.54%

2.09%

RAMS

$4,000

2.59%

2.09%

People's Choice Credit Union

$4,000

2.49%

2.09%

Citi

$4,000

2.59%

2.09%

HSBC

$3,288

2.44%

1.88%

Westpac

$3,000

2.19% for 2 yrs then 2.69%

1.99%

ANZ (broker only)

$3,000

2.72%

2.04%

Reduce Home Loans

$3K - $5K

2.49%

N/A

Source: RateCity.com.au. For home loans under $850,000. Rates are for owner-occupiers paying principal and interest. LVR and loan size restrictions may apply. Reduce Home Loans offers $5K cashback on $1M loans however for the average loans, $3K cashback applies.

Before refinancing for a cashback deal – check:

  • Is the interest rate competitive? Look for a rate starting with a ‘2’ or even better a ‘1’.
  • Pick a loan that suits that your finances.
  • Are the fees high? Ask the new lender to waive them if there are.
  • Can you refinance? You’re likely to need a steady job and at least a 20% deposit or equity.
  • Can you put the cashback bonus into your mortgage? Extra repayments help reduce your interest charges in the long run.

Notes: Calculations are based on an owner occupier paying principal and interest, with a balance of $400K switching 5 years in to a 30-year loan. Costs include interest charged plus fees minus any cashback offered. Lowest variable rate is from Homestar Finance. Rates are the lowest available from each lender in each category and some rates require a low LVR to qualify (Westpac 70% LVR, Homestar Finance, 60% LVR). ANZ's cashback is only available to new customers applying via a broker. Assumes variable rates remain the same.

Did you find this helpful? Why not share this news?

This article was reviewed by Research Director Sally Tindall before it was published as part of RateCity's Fact Check process.

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Learn more about home loans

What is the difference between fixed, variable and split rates?

Fixed rate

A fixed rate home loan is a loan where the interest rate is set for a certain amount of time, usually between one and 15 years. The advantage of a fixed rate is that you know exactly how much your repayments will be for the duration of the fixed term. There are some disadvantages to fixing that you need to be aware of. Some products won’t let you make extra repayments, or offer tools such as an offset account to help you reduce your interest, while others will charge a significant break fee if you decide to terminate the loan before the fixed period finishes.

Variable rate

A variable rate home loan is one where the interest rate can and will change over the course of your loan. The rate is determined by your lender, not the Reserve Bank of Australia, so while the cash rate might go down, your bank may decide not to follow suit, although they do broadly follow market conditions. One of the upsides of variable rates is that they are typically more flexible than their fixed rate counterparts which means that a lot of these products will let you make extra repayments and offer features such as offset accounts.

Split rates home loans

A split loan lets you fix a portion of your loan, and leave the remainder on a variable rate so you get a bet each way on fixed and variable rates. A split loan is a good option for someone who wants the peace of mind that regular repayments can provide but still wants to retain some of the additional features variable loans typically provide such as an offset account. Of course, with most things in life, split loans are still a trade-off. If the variable rate goes down, for example, the lower interest rates will only apply to the section that you didn’t fix.

What happens to my home loan when interest rates rise?

If you are on a variable rate home loan, every so often your rate will be subject to increases and decreases. Rate changes are determined by your lender, not the Reserve Bank of Australia, however often when the RBA changes the cash rate, a number of banks will follow suit, at least to some extent. You can use RateCity cash rate to check how the latest interest rate change affected your mortgage interest rate.

When your rate rises, you will be required to pay your bank more each month in mortgage repayments. Similarly, if your interest rate is cut, then your monthly repayments will decrease. Your lender will notify you of what your new repayments will be, although you can do the calculations yourself, and compare other home loan rates using our mortgage calculator.

There is no way of conclusively predicting when interest rates will go up or down on home loans so if you prefer a more stable approach consider opting for a fixed rate loan.

What is a variable home loan?

A variable rate home loan is one where the interest rate can and will change over the course of your loan. The rate is determined by your lender, not the Reserve Bank of Australia, so while the cash rate might go down, your bank may decide not to follow suit, although they do broadly follow market conditions. One of the upsides of variable rates is that they are typically more flexible than their fixed rate counterparts which means that a lot of these products will let you make extra repayments and offer features such as offset accounts.

Cash or mortgage – which is more suitable to buy an investment property?

Deciding whether to buy an investment property with cash or a mortgage is a matter or personal choice and will often depend on your financial situation. Using cash may seem logical if you have the money in reserve and it can allow you to later use the equity in your home. However, there may be other factors to think about, such as whether there are other debts to pay down and whether it will tie up all of your spare cash. Again, it’s a personal choice and may be worth seeking personal advice.

A mortgage is a popular option for people who don’t have enough cash in the bank to pay for an investment property. Sometimes when you take out a mortgage you can offset your loan interest against the rental income you may earn. The rental income can also help to pay down the loan.

Why does Westpac charge an early termination fee for home loans?

The Westpac home loan early termination fee or break cost is applicable if you have a fixed rate home loan and repay part of or the whole outstanding amount before the fixed period ends. If you’re switching between products before the fixed period ends, you’ll pay a switching break cost and an administrative fee. 

The Westpac home loan early termination fee may not apply if you repay an amount below the prepayment threshold. The prepayment threshold is the amount Westpac allows you to repay during the fixed period outside your regular repayments.

Westpac charges this fee because when you take out a home loan, the bank borrows the funds with wholesale rates available to banks and lenders. Westpac will then work out your interest rate based on you making regular repayments for a fixed period. If you repay before this period ends, the lender may incur a loss if there is any change in the wholesale rate of interest.

How long can you fix a home loan rate for?

Most lenders should let you fix your interest rate for anywhere between one and five years. While rare, a few lenders may offer fixed rate terms for as long as 10 years.

Fixing your home loan interest rate for a longer term can keep your budgeting fairly straightforward, as you shouldn't have to factor in changes to your mortgage repayments if variable rates change, such as when the Reserve Bank of Australia (RBA) changes its rates at its monthly meeting. Additionally, if variable rates rise during your fixed rate term, you can continue to pay the lower fixed rate until the fixed term ends, potentially saving you some money.

Of course, a longer fixed term also means a longer length of time where you may have less flexibility in your home loan repayments. It’s also a longer period where you won’t be able to refinance your mortgage without paying break fees. If variable rates were to fall during this period, you may also be stuck paying a higher fixed rate for a longer period.

What is the difference between a fixed rate and variable rate?

A variable rate can fluctuate over the life of a loan as determined by your lender. While the rate is broadly reflective of market conditions, including the Reserve Bank’s cash rate, it is by no means the sole determining factor in your bank’s decision-making process.

A fixed rate is one which is set for a period of time, regardless of market fluctuations. Fixed rates can be as short as one year or as long as 15 years however after this time it will revert to a variable rate, unless you negotiate with your bank to enter into another fixed term agreement

Variable rates is that they are typically more flexible than their fixed rate counterparts which means that a lot of these products will let you make extra repayments and offer features such as offset accounts however fixed rates do offer customers a level of security by knowing exactly how much they need to set aside each month.

Does the Home Loan Rate Promise apply to discounted interest rate offers, such as honeymoon rates?

No. Temporary discounts to home loan interest rates will expire after a limited time, so they aren’t valid for comparing home loans as part of the Home Loan Rate Promise.

However, if your home loan has been discounted from the lender’s standard rate on a permanent basis, you can check if we can find an even lower rate that could apply to you.

What is a comparison rate?

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.

What is a standard variable rate (SVR)?

The standard variable rate (SVR) is the interest rate a lender applies to their standard home loan. It is a variable interest rate which is normally used as a benchmark from which they price their other variable rate home loan products.

A standard variable rate home loan typically includes most, if not all the features the lender has on offer, such as an offset account, but it often comes with a higher interest rate attached than their most ‘basic’ product on offer (usually referred to as their basic variable rate mortgage).

What is a fixed home loan?

A fixed rate home loan is a loan where the interest rate is set for a certain amount of time, usually between one and 15 years. The advantage of a fixed rate is that you know exactly how much your repayments will be for the duration of the fixed term. There are some disadvantages to fixing that you need to be aware of. Some products won’t let you make extra repayments, or offer tools such as an offset account to help you reduce your interest, while others will charge a significant break fee if you decide to terminate the loan before the fixed period finishes.

What are the different types of home loan interest rates?

A home loan interest rate is used to calculate how much you’ll pay the lender, usually annually, above the amount you borrow. It’s what the lenders charge you for them lending you money and will impact the total amount you’ll pay over the life of your home loan. 

Having understood what are home loan rates in general, here are the two types you usually have with a home loan:

Fixed rates

These interest rates remain constant for a specific period and are a good option if you’re a first-time buyer or if you’re looking for a fixed monthly repayment. One possible downside of a fixed rate is that it may be higher than a variable rate. Also, you don’t benefit from any lowering of interest rates in the market. On the flip side, if rates go up, your rate won’t change, possibly saving you money.

Variable rates

With variable interest rates, the lender can change them at any time. This change can be based on economic conditions or other reasons. Changes in interest rates could be beneficial if your monthly repayment decreases but can be a problem if it increases. Variable interest rates offer several other benefits often not available with fixed rate home loans like redraw and offset facilities and free extra repayments. 

What is the Home Loan Rate Promise?

The Home Loan Rate Promise is RateCity putting its money where its mouth is. We believe that too many Australians are paying too much for their home loans. We’re so confident we can help Aussies save money, if we can’t beat your current rate, we’ll give you a $100 gift card.*

There are two reasons it pays to check your rate with the Home Loan Rate Promise:

  • You can find out how much you could save on your home loan by switching to a loan with a lower interest rate
  • If we can’t beat your current rate, you can claim a $100 gift card with our Home Loan Rate Promise*

How does ANZ calculate early repayment costs?

If you have a fixed interest home loan, you’ll pay ANZ home loan early exit fees for partial or full repayment of the loan amount before the end of the fixed interest rate duration. These fees are also payable if you switch to another variable or fixed-rate loan.

The ANZ mortgage early exit fees can vary and you can get an estimate from the lender before you decide to prepay the loan. However, the exact early repayment cost can be determined when you prepay the loan.

The early exit fees are calculated after considering factors like the prepayment amount, the period left before the fixed-rate duration ends, and the change in the market rates since the beginning of the fixed-rate period. The early exit fees may not be charged if you’re paying off a smaller amount. You can check with ANZ to see how much you’ll have to pay.