Fixed home loan rate war: St. George, Bank of Melbourne and BankSA cut rates

Fixed home loan rate war: St. George, Bank of Melbourne and BankSA cut rates

Three major Australian banks, St George, Bank of Melbourne and BankSA, cut fixed home loan rates by as much as 0.25 per cent, as the fixed rate war continues to rage.

The Westpac Group subsidiaries announced the cuts on Friday, becoming the latest of 104 lenders to cut fixed home loan rates since March 2020.

  • St. George and Bank of Melbourne are now offering 2- and 3-year fixed rates from 2.59 per cent.
  • BankSA is now offering 2- and 3-year fixed rates from 2.69 per cent.

These latest rate cuts are most likely designed to get new business on Westpac Group’s books, as home loan lenders across Australia battle it out with historically low fixed rates.

Since March, the average 2-year fixed rate has fallen 54 basis points from 3.18 per cent to 2.64 percent.

Average 2-, 3- and 5-year fixed rates from March – June 2020

Date 2- year fixed 3-year fixed 5-year fixed
1 March

3.18%

3.23%

3.48%

22 June

2.64%

2.72%

3.09%

Difference

-0.54%

-0.51%

-0.39%

Source: RateCity.com.au. Notes: Rates based on the average owner-occupier, principal and interest fixed rates from 1 March 2020 to 22 June 2020.

Interestingly, the lowest rates on offer from St. George and Bank of Melbourne are being reserved for homeowners with minimum LVRs of 60 per cent.

This means that those looking to switch to these competitive rates will need significant equity in their home, or first home buyers will need deposits of at least 40 per cent.

Put simply, these lenders are saving their lowest rates for the safest borrowers.

To fix or not to fix

If you’re a first home buyer, or if you’ve been on a variable home loan and are considering refinancing, you may be wondering if now is the right time is to fix?

With Australia entering its first recession in almost 30 years, we’re certainly treading uncertain economic waters. However, a general rule of thumb is that you cannot predict the bottom of the market.

While fixed rates are at a record low, this may change in the long term as some banks have reversed the trend by hiking their rates.

According to RateCity research, 6 banks actually hiked their fixed rates in June, including ING, which previously offered the lowest fixed rate in the market (2.09 per cent).

If you believe that a good fixed rate offer is on the line, there are a few things to consider before fixing:

  • Certainty in repayments. A fixed home loan rate means you’ll be making the same consistent repayment each month until the end of the fixed period. If you’re the type of borrower who likes a stable budget, then a fixed home loan may suit you.
  • Protected from cash rate hikes. If the RBA were to raise the cash rate, your variable interest rate would follow suit. Fixing your home loan is one way of ensuring you’re not at the mercy of the market.
  • Revert rates. Once the fixed rate period ends, your home loan may automatically switch to your lender’s variable interest rate, which is typically much higher.
  • Miss out on cash rate cuts. While a fixed rate may protect you from an increased cash rate, it does mean you miss out on any potential further cuts. You may end up stuck on a fixed rate that’s higher than the lowest variable rates.

 

If you’re sure about fixing your home loan, you’ll want to make sure you do your research. Don’t just look at the interest rates, but ensure you compare potential fees and features. And as noted above, you may need to ensure you have a large deposit or some equity up your sleeve before you can qualify for the lowest home loan rates on offer.

Here are a range of the lowest fixed rate home loans on the RateCity database:

Lowest fixed owner-occupier home loan rates

Lender Home loan Fixed term Advertised rate Comparison rate
HSBC Premier Fixed Rate Home Loan

2 years

2.09%

3.10%

BCU Fixed Home Loan

2 years

2.12%

3.78%

Newcastle Permanent Premium Plus Package Fixed Rate Home Loan Special

2 years

2.18%

3.72%

Source: RateCity.com.au. Notes: Data based on lowest owner-occupier, principal and interest fixed rates, accurate as at 22/06/2020.

Big four bank lowest owner-occupier fixed rates

Lender Home loan Fixed term Advertised rate Comparison rate
CBA Wealth Package Fixed Rate Home Loan 2 years 2.29% 3.99%
NAB Choice Package Tailored Home Loan Fixed 2 years 2.19% 4.02%
Westpac Premier Package Fixed Options Home Loan 2 years 2.19% 3.43%
ANZ Breakfree Package Fixed Rate Home Loan 2 years 2.29% 4.02%

Source: RateCity.com.au. Notes: Data based on lowest owner-occupier, principal and interest fixed rates, accurate as at 22/06/2020.

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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 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 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.

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 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.

Who has the best home loan?

Determining who has the ‘best’ home loan really does depend on your own personal circumstances and requirements. It may be tempting to judge a loan merely on the interest rate but there can be added value in the extras on offer, such as offset and redraw facilities, that aren’t available with all low rate loans.

To determine which loan is the best for you, think about whether you would prefer the consistency of a fixed loan or the flexibility and potential benefits of a variable loan. Then determine which features will be necessary throughout the life of your loan. Thirdly, consider how much you are willing to pay in fees for the loan you want. Once you find the perfect combination of these three elements you are on your way to determining the best loan for you. 

How common are low-deposit home loans?

Low-deposit home loans aren’t as common as they once were, because they’re regarded as relatively risky and the banking regulator (APRA) is trying to reduce risk from the mortgage market.

However, if you do your research, you’ll find there is still a fairly wide selection of banks, credit unions and non-bank lenders that offers low-deposit home loans.

How do I take out a low-deposit home loan?

If you want to take out a low-deposit home loan, it might be a good idea to consult a mortgage broker who can give you professional financial advice and organise the mortgage for you.

Another way to take out a low-deposit home loan is to do your own research with a comparison website like RateCity. Once you’ve identified your preferred mortgage, you can apply through RateCity or go direct to the lender.

How can I negotiate a better home loan rate?

Negotiating with your bank can seem like a daunting task but if you have been a loyal customer with plenty of equity built up then you hold more power than you think. It’s highly likely your current lender won’t want to let your business go without a fight so if you do your research and find out what other banks are offering new customers you might be able to negotiate a reduction in interest rate, or a reduction in fees with your existing lender.

What is an ombudsman?

An complaints officer – previously referred to as an ombudsman -looks at formal complaints from customers about their credit providers, and helps to find a fair and independent solution to these problems.

These services are handled by the Australian Financial Complaints Authority, a non-profit government organisation that addresses and resolves financial disputes between customers and financial service providers.

How much of the RBA rate cut do lenders pass on to borrowers?

When the Reserve Bank of Australia cuts its official cash rate, there is no guarantee lenders will then pass that cut on to lenders by way of lower interest rates. 

Sometimes lenders pass on the cut in full, sometimes they partially pass on the cut, sometimes they don’t at all. When they don’t, they often defend the decision by saying they need to balance the needs of their shareholders with the needs of their borrowers. 

As the attached graph shows, more recent cuts have seen less lenders passing on the full RBA interest rate cut; the average lender was more likely to pass on about two-thirds of the 25 basis points cut to its borrowers.  image002