Home loan market shows signs of life as variable rates hit 1.95%

New home lending has partially recovered from its record drop last month according to ABS figures released today. It comes as home loan rates keep on tumbling, with a new lowest ongoing variable rate of 1.95 per cent now on the market.

ABS Lending Indicators

The latest ABS figures show the value of new lending rose by 6.2 per cent in the month of June, on the back of a record drop in May. When compared to pre-COVID conditions (February), new lending still recorded a drop of 10.4 per cent, in seasonally adjusted terms.

The number of people refinancing fell 11.1 per cent month-on-month on the back of a record rise in May. However, compared to February, refinancing was up 23.8 per cent, and rose 52.1 per cent compared to June last year.

Value of new loans   % change % change
June-20 May 2020 – Jun 2020 Jun 2019 – Jun 2020
Total housing  

$1.01 billion

$747.40 million

$17.43 billion

6.18%

4.48%

Owner occupiers

 

$679.80 million

$1.03 billion

$12.99 billion

5.52%

8.65%

Investors

 

$333.9 million

-$287.40 million

$4.44 billion

8.14%

-6.09%

Notes: Seasonally adjusted figures. Figures exclude refinancing.

Source: ABS lending indicator statistics for June 2020, released 5 August 2020.

External refinancing   % change % change
June-20 May 2020 – Jun 2020 Jun 2019 – Jun 2020
Number

19,327

-11.05%

52.11%

Value

$8.90 billion

-11.90%

73.99%

Notes: Based on the number and value of new loans to owner occupiers using seasonally adjusted figures.

Source: ABS lending indicator statistics for June 2020, released 5 August 2020.

The data from June largely reflects changes in the home lending market in May as new sales typically take six weeks to settle.

RateCity research director, Sally Tindall, said the increase in new lending this month showed there was still signs of life in the property market despite the turmoil however the outlook was still uncertain.

“Last month we saw the biggest drop in new lending on record as a result of the nation being in lockdown,” she said.

“It’s not surprising to see new lending has bounced back in June, as restrictions began to lift on auctions and open homes in May. However, with Victoria back in lockdown, and hundreds of new COVID-19 cases emerging every day, the longer-term trend for the housing market is still likely to be down.

Ongoing variable rates hit 1.95%

Low cost lender, Easy Street Financial, has undercut its competitors with an ongoing variable rate of 1.95 per cent, and a comparison rate of 1.99 per cent.

The rate is available for owner-occupiers paying principal and interest on loans of $750,000 or more, with a deposit of 20 per cent or more.

Sally Tindall, research director at RateCity.com.au, said: “Home loan rates keep on falling as the low-cost lenders chase each other under the 2 per cent barrier.”

“It’s unusual to see this many rate cuts when the RBA hasn’t, and isn’t likely to move rates anytime soon. Yet every week records are broken.

“This competition between the banks is motivating people to switch lenders. Today’s ABS figures show a 73 per cent increase in external refinances from June last year.

“There are now four home loan lenders offering at least one rate under 2 per cent and the list is growing every week,” she said.

Lowest rates on the RateCity database

Lowest ongoing variable rates

Lender Advertised rate
EasyStreet (loans over $750K)

1.95%

Reduce Home Loans

2.19%

Homestar Finance

2.29%

Lowest 1-year fixed rates 

Lender Advertised rate
Homestar Finance

1.98%

Greater Bank

2.09%

UBank

2.14%

Lowest 2-year fixed rates

Lender Advertised rate
Community First Credit Union

1.99%

Homestar Finance

2.06%

HSBC

2.09%

Lowest 3-year fixed rates 

Lender Advertised rate
UBank

2.14%

BCU

2.16%

Macquarie Bank, Westpac

2.19%

Notes: above rates are for owner-occupiers paying principal and interest.

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Learn more about home loans

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 are the pros and cons of no-deposit home loans?

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.

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 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.

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.

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.

Does Australia have no-deposit home loans?

Australia no longer has no-deposit home loans – or 100 per cent home loans as they’re also known – because they’re regarded as too risky.

However, some lenders allow some borrowers to take out mortgages with a 5 per cent deposit.

Another option is to source a deposit from elsewhere – either by using a parental guarantee or by drawing out equity from another property.

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.

How much deposit will I need to buy a house?

A deposit of 20 per cent or more is ideal as it’s typically the amount a lender sees as ‘safe’. Being a safe borrower is a good position to be in as you’ll have a range of lenders to pick from, with some likely to offer up a lower interest rate as a reward. Additionally, a deposit of over 20 per cent usually eliminates the need for lender’s mortgage insurance (LMI) which can add thousands to the cost of buying your home.

While you can get a loan with as little as 5 per cent deposit, it’s definitely not the most advisable way to enter the home loan market. Banks view people with low deposits as ‘high risk’ and often charge higher interest rates as a precaution. The smaller your deposit, the more you’ll also have to pay in LMI as it works on a sliding scale dependent on your deposit size.

How do I know if I have to pay LMI?

Each lender has its own policies, but as a general rule you will have to pay lender’s mortgage insurance (LMI) if your loan-to-value ratio (LVR) exceeds 80 per cent. This applies whether you’re taking out a new home loan or you’re refinancing.

If you’re looking to buy a property, you can use this LMI calculator to work out how much you’re likely to be charged in LMI.

What happens when you default on your mortgage?

A mortgage default occurs when you are 90 days or more behind on your mortgage repayments. Late repayments will often incur a late fee on top of the amount owed which will continue to gather interest along with the remaining principal amount.

If you do default on a mortgage repayment you should try and catch up in next month’s payment. If this isn’t possible, and missing payments is going to become a regular issue, you need to contact your lender as soon as possible to organise an alternative payment schedule and discuss further options.

You may also want to talk to a financial counsellor. 

How personalised is my rating?

Real Time Ratings produces instant scores for loan products and updates them based what you tell us about what you’re looking for in a loan. In that sense, we believe the ratings are as close as you get to personalised; the more you tell us, the more we customise to ratings to your needs. Some borrowers value flexibility, while others want the lowest cost loan. Your preferences will be reflected in the rating. 

We also take a shorter term, more realistic view of how long borrowers hold onto their loan, which gives you a better idea about the true borrowing costs. We take your loan details and calculate how much each of the relevent loans would cost you on average each month over the next five years. We assess the overall flexibility of each loan and give you an easy indication of which ones are likely to adjust to your needs over time. 

How often is your data updated?

We work closely with lenders to get updates as quick as possible, with updates made the same day wherever possible.

How can I get a home loan with no deposit?

Following the Global Financial Crisis, no-deposit loans, as they once used to be known, have largely been removed from the market. Now, if you wish to enter the market with no deposit, you will require a property of your own to secure a loan against or the assistance of a guarantor.