CASH RATE ON HOLD: But fixed rates keep tumbling

CASH RATE ON HOLD: But fixed rates keep tumbling

The RBA has left cash rate on hold today at an historic low of 1 per cent.

Reserve Bank Governor Philip Lowe has indicated there will be a prolonged period of low rates and further cuts are still on the table. 

While the cash rate has remained steady since July, more than 30 lenders have cut fixed rates, suggesting they are pricing in at least one more rate cut.

Right now, the average 3-year fixed rate for owner-occupiers paying principal and interest on RateCity.com.au is 3.51 per cent. A year ago today, it was 4.10 per cent. That’s a difference of 59 basis points.

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Source: RateCity.com.au Average rate for owner-occupiers paying principal and interest. 

RateCity.com.au research director Sally Tindall said: “There are now over 30 lenders offering fixed home loans below 3 per cent, with more set to follow as the expectations of another cut ramp up.”

“A lot of home owners that fixed their rate at 4 or 5 per cent will now probably feel like they’re missing out, even though it could have been a cracking deal at the time.

“Fixed rates are a contract, and if you break it, you’re likely to be liable for any loss that your bank incurs. Often, this fee can run into the thousands.

“That said, if you are unhappy with your rate, it never hurts to give your bank a call and see what can be done.

“At worst they’ll tell you what your break fees will be, and you can consider your options. At best, there’s a chance, albeit slim, that your bank will cut you some slack, especially if they want to keep you on their books,” she said.

If you have a fixed home loan – can you get out of it?

  • Find out break costs: Ask your bank to calculate how much they’ll charge you for exiting your fixed loan early.
  • Compare home loans: Find the best home loan on offer that meets your needs.
  • Do the maths: How long will it take you to break even if you paid the break fee and switched home loans.
  • Make a decision: Decide if it’s worth your while to break your fixed loan and switch home loans.

Things to consider before committing to a fixed rate mortgage

  • How do fixed rates compare to variable rates? Make sure you’re happy paying the rate you sign up to, even if rates fall further.
  • What’s your plan for the property? If you sell or refinance within the fixed loan term you could be liable for break fees.
  • Do you want to make substantial extra repayments or have the flexibility of an offset? Fixed rates typically are far less flexible than variable rate loans so check the terms and conditions before signing.
  • How many years do you want to fix your home loan for? Remember it’s a contract that you’ll be expected to keep for the whole term.
  • What will you do when the fixed term is up? Check the revert rate, make a plan for what you might want to do when it ends and diarise the end date.

Some of the lowest home loan rates 

Variable rates

Mortgage House

2.89%

Reduce Home Loans

2.89%

Well Home Loans

2.97%

Homestar Finance

2.99%

Pacific Mortgage Group

2.99%

3-year fixed rates

Well Home Loans

2.74%

Kogan Money

2.77%

Reduce Home Loans

2.79%

Mortgage House

2.79%

RACQ

2.80%

5-year fixed rates

Bank of Melbourne

2.94%

St.George Bank

2.94%

Greater Bank

2.99%

BankSA

2.99%

Citi

2.99%

Source: RateCity.com.au 

Rates are for owner-occupiers paying principal and interest and many have conditions, including LVR requirements.

Mortgage House variable rate is not available to NSW customers.

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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 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 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 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.

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 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 split home loan?

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 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 break fee?

Break fees are charged when a customer terminates a fixed-rate mortgage. The amount is determined at the time you decide to break the loan and is based on how much your bank stands to lose by you breaking the contract. As a general rule, the more the variable rate has dropped, the higher the fee will be.

What is the best interest rate for a mortgage?

The fastest way to find out what the lowest interest rates on the market are is to use a comparison website.

While a low interest rate is highly preferable, it is not the only factor that will determine whether a particular loan is right for you.

Loans with low interest rates can often include hidden catches, such as high fees or a period of low rates which jumps up after the introductory period has ended.

To work out the best value for money, have a look at a loan’s comparison rate and read the fine print to get across all the fees and charges that you could be theoretically charged over the life of the loan.

Does Australia have no cost refinancing?

No Cost Refinancing is an option available in the US where the lender or broker covers your switching costs, such as appraisal fees and settlement costs. Unfortunately, no cost refinancing isn’t available in Australia.

Can I change jobs while I am applying for a home loan?

Whether you’re a new borrower or you’re refinancing your home loan, many lenders require you to be in a permanent job with the same employer for at least 6 months before applying for a home loan. Different lenders have different requirements. 

If your work situation changes for any reason while you’re applying for a mortgage, this could reduce your chances of successfully completing the process. Contacting the lender as soon as you know your employment situation is changing may allow you to work something out. 

Can I get a home loan if I am on an employment contract?

Some lenders will allow you to apply for a mortgage if you are a contractor or freelancer. However, many lenders prefer you to be in a permanent, ongoing role, because a more stable income means you’re more likely to keep up with your repayments.

If you’re a contractor, freelancer, or are otherwise self-employed, it may still be possible to apply for a low-doc home loan, as these mortgages require less specific proof of income.

Will I have to pay lenders' mortgage insurance twice if I refinance?

If your deposit was less than 20 per cent of your property’s value when you took out your original loan, you may have paid lenders’ mortgage insurance (LMI) to cover the lender against the risk that you may default on your repayments. 

If you refinance to a new home loan, but still don’t have enough deposit and/or equity to provide 20 per cent security, you’ll need to pay for the lender’s LMI a second time. This could potentially add thousands or tens of thousands of dollars in upfront costs to your mortgage, so it’s important to consider whether the financial benefits of refinancing may be worth these costs.