What the big bank rate cuts mean for mortgage holders

What the big bank rate cuts mean for mortgage holders

Wednesday 3 July 2019: Australia’s central bank might have cut the cash rate by 0.50 per cent over the last two months but all four banks have decided to keep a portion of the cuts back from their variable rate home loan customers. 

What the big banks are passing on to their variable rate home loan customers:

Lender

June rate cut

July rate cut

Total rate cut

CBA

0.25%

0.19%

0.44%

Westpac

0.20%

0.20%

0.40%

NAB

0.25%

0.19%

0.44%

ANZ

0.18%

0.25%

0.43%

Note: the above rate cuts are for owner occupiers paying principal and interest. In July CBA is giving a 0.25 per cent cut for customers paying interest-only, while Westpac is handing down a 0.30 per cent for investors paying interest-only. 

How much will the average home owner save?

The typical Australian is with a big four bank on a discounted variable rate. RateCity.com.au has calculated what the last two months of rate cuts means for them, based on a $400K loan.

Old rate (May)

New rate (July)

Monthly savings

Annual savings

Missed monthly savings

Missed annual savings

CBA

4.77%

4.33%

$105

$1,259

-$14

-$169

Westpac

4.58%

4.18%

$94

$1,133

-$23

-$279

NAB

4.51%

4.07%

$103

$1,239

-$14

-$166

ANZ

4.56%

4.13%

$101

$1,215

-$16

-$195 

Note: the above calculations are based on a person with a $400K, 30-year loan on a discounted variable rate with one of the big four banks. Missed savings are calculated based on what a customer would have saved if the bank had passed on both rate cuts in full. 

Big four banks – state of play

As a result of today’s announcements, CBA and NAB are set to have the lowest ongoing variable rates from the big four banks at 3.35 per cent.

Standard Variable Rate

Discounted Variable Rate

Lowest variable rate

CBA

4.93%

4.33%

3.35%

Westpac

4.98%

4.18%

3.58%

NAB

4.92%

4.07%

3.35%

ANZ

4.93%

4.13%

3.38%

Note: Rates are based on an owner-occupier paying principal and interest repayments on $400,000, 30-year loan.

Big bank rate cuts – effective dates: 

ANZ and NAB are passing on this round of rate cuts within the first two weeks while CBA is once more taking three weeks to pass the latest rate cut on to home loan customers.

  • CBA rates effective 23 July 2019
  • Westpac rates effective 16 July 2019
  • NAB rates effective 12 July 2019
  • ANZ rates effective 12 July 2019

Some of the lowest ongoing variable rates following Tuesday’s cut:

  • Reduce home loans: 2.89%
  • Homestar Finance: 2.99%
  • Athena home loans: 3.09%

Comments from RateCity.com.au research director Sally Tindall:

 “The majority of variable rate home owners are set to save over $100 a month as a result of these two cash rate cuts. For many it’s money they can spend paying off the winter electricity bills, buying groceries or on extra mortgage repayments. 

“The extra cash might  feel like a win for families, but that doesn’t necessarily mean they’re on a good home loan wicket. Rates have dropped to as low as 2.89 per cent which is well below any of the big banks’ offerings.

“Any cut to the cash rate is always a double-edge sword as savers brace for another round of deposit rate cuts.

“RateCity.com.au’s average savings rate is 1.51 per cent but this is set to drop below inflation in coming days as this most recent cash rate cut gets passed on,” she said.

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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 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 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.

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 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 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*

What is a honeymoon rate and honeymoon period?

Also known as the ‘introductory rate’ or ‘bait rate’, a honeymoon rate is a special low interest rate applied to loans for an initial period to attract more borrowers. The honeymoon period when this lower rate applies usually varies from six months to one year. The rate can be fixed, capped or variable for the first 12 months of the loan. At the end of the term, the loan reverts to the standard variable rate.

What are the features of home loans for expats from Westpac?

If you’re an Australian citizen living and working abroad, you can borrow to buy a property in Australia. With a Westpac non-resident home loan, you can borrow up to 80 per cent of the property value to purchase a property whilst living overseas. The minimum loan amount for these loans is $25,000, with a maximum loan term of 30 years.

The interest rates and other fees for Westpac non-resident home loans are the same as regular home loans offered to borrowers living in Australia. You’ll have to submit proof of income, six-month bank statements, an employment letter, and your last two payslips. You may also be required to submit a copy of your passport and visa that shows you’re allowed to live and work abroad.

Remaining loan term

The length of time it will take to pay off your current home loan, based on the currently-entered mortgage balance, monthly repayment and interest rate.

When do mortgage payments start after settlement?

Generally speaking, your first mortgage payment falls due one month after the settlement date. However, this may vary based on your mortgage terms. You can check the exact date by contacting your lender.

Usually your settlement agent will meet the seller’s representatives to exchange documents at an agreed place and time. The balance purchase price is paid to the seller. The lender will register a mortgage against your title and give you the funds to purchase the new home.

Once the settlement process is complete, the lender allows you to draw down the loan. The loan amount is debited from your loan account. As soon as the settlement paperwork is sorted, you can collect the keys to your new home and work your way through the moving-in checklist.

How to use the ME Bank reverse mortgage calculator?

You can access the equity in your home to help you fund your needs during your senior years. A ME Bank reverse mortgage allows you to tap into the equity you’ve built up in your home while you continue living in your house. You can also use the funds to pay for your move to a retirement home and repay the loan when you sell the property.

Generally, if you’re 60 years old, you can borrow up to 15 per cent of the property value. If you are older than 75 years, the amount you can access increases to up to 30 per cent. You can use a reverse mortgage calculator to know how much you can borrow.

To take out a ME Bank reverse mortgage, you’ll need to provide information like your age, type of property – house or an apartment, postcode, and the estimated market value of the property. The loan to value ratio (LVR) is calculated based on your age and the property’s value.

What is the average annual percentage rate?

Also known as the comparison rate, or sometimes the ‘true rate’ of a loan, the average annual percentage rate (AAPR) is used to indicate the overall cost of a loan after considering all the fees, charges and other factors, such as introductory offers and honeymoon rates.

The AAPR is calculated based on a standardised loan amount and loan term, and doesn’t include any extra non-standard charges.