Australian investor mortgage rates hit record low of 2.18%

Australian investor mortgage rates hit record low of 2.18%

Non-bank lender Homestar Finance has introduced a record-breaking 2.18 per cent mortgage rate for property investors, as the lowest investor rate in Australia nudges closer to 2 per cent. 

The 2.18 per cent investor rate is fixed for one year, with a comparison rate of 2.58 per cent.

The new rate is 31 basis points lower than the lowest fixed investment rate from a big four bank of 2.49 per cent, coming from Westpac, NAB and ANZ.

Homestar’s rate is also 1.40 per cent lower than the Reserve Bank of Australia’s (RBA) average existing customer rate of 3.58 per cent.

Aside from the lowest fixed investor rate, Homestar also shares the title of lowest variable investor rate with Westpac, both offering variable options at 2.49 per cent.

Loans.com.au has a 1.99 per cent investor rate, but investors must also bundle their owner-occupier loan with the online lender. 

How much investors could save by refinancing

Investment property owners refinancing to the lowest investor rate could stand to pocket back nearly $3,000 in the first year, a RateCity analysis found.

If an investor mortgage holder on the RBA’s average existing customer rate of 3.58 per cent switched to a Homestar’s 2.18 per cent rate, they could potentially save $289 a month. Over the longer term, the potential savings after fees might look like this:

  • $2,723 in the first year
  • $4,701 in the first two years
  • $12,871 in the first five years
  • $85,958 over the life of the loan.

The calculations assume a borrower is five years into a 30-year, $400,000 home loan and is paying principal and interest.

Investor rates drop along with owner-occupier rates

Property investors have been putting the brakes on borrowing. New investor loans declined by 29 per cent, or $1.8 billion, in the two years to June 2020, Australian Bureau of Statistics (ABS) data indicated.  

Lenders have taken action, with competition cranking up. In the past two months, 39 lenders trimmed their investor rates, including Commonwealth Bank, which cut their investor rates by up to 15 basis points today.

Westpac rolled out an introductory investment variable rate of 2.49 per cent for new customers last week, with the rate being the lowest for investors among the big four banks. 

Investors can potentially snag a rate below 2.5 per cent from 33 lenders, while 98 lenders have rates below 3 per cent.

Sally Tindall, research director at RateCity, said smaller lenders need to be more competitive to stand a chance against major banks.

“Low cost lenders can’t outdo the big four banks when it comes to marketing, so undercutting their rates is essential to attracting customers,” she said, adding that it was likely that some lenders may cut their new customer rates further.

There are growing predictions that the RBA may lower the official cash rate by 15 basis points to 0.10 per cent as soon as October. 

The next RBA meeting falls on October 6, the same day that Treasurer Josh Frydenberg will hand down the federal budget, in which further lifts to spending are expected. 

Investors may struggle as rental market weakens

The falling investor rates may help cushion the impacts of a struggling rental market. National rent values edged lower by 0.8 per cent between April and August, CoreLogic data showed. 

The firm’s head of Australian research Eliza Owen said Sydney and Melbourne were seeing more acute falls of 4.2 per cent and 4.4 per cent respectively in the same period.

Inner-city landlords may need to prepare for several years of “subdued” rental growth, the RBA said, largely due to fewer international students and migrants. 

It comes as some states, including NSW and Victoria, move to extend their moratoriums on tenant evictions, which bans landlords from kicking out tenants who have been financially affected by COVID-19. 

A quarter, or 826,000, of investors are experiencing mortgage stress amid tumbling rents, compared with some 40 per cent of owner-occupiers feeling the pinch, the latest research from Digital Finance Analytics found.

Lowest investor P&I rates on RateCity.com.au

  Lender Advertised rate
Variable Homestar Finance

2.49%

1-year fixed Homestar Finance

2.18%

2-year fixed Police Credit Union

2.19%

3-year fixed Hume Bank (Local post codes only)

1.99%

5-year fixed HSBC

2.69%

Source: RateCity.com.au. 
Note: Data accurate as of 25.09.2020.
Hume Bank rate is only available to new loans for renovation or construction of new properties within 150 km of Albury Post Office.

Lowest big four banks investor P&I rates

  Basic variable Variable with offset 2yr fixed 3yr fixed 5yr fixed
CBA

3.12%

4.43%

2.69%

2.69%

3.09%

Westpac

2.49%

3.74%

2.49%

2.49%

2.99%

NAB

3.09%

4.27%

2.49%

2.59%

3.09%

ANZ

3.12%

4.19%

2.49%

2.49%

2.99%

*LVR and loan amount restrictions apply. Assumed loan amount of $400k (affects NAB and ANZ offset rates), and LVR up to 70%.
*Westpac's Basic Variable rate is a 2-year introductory rate of 2.49% which then reverts to 3.09% at the end of the introductory term.

Source: RateCity.com.au. Data accurate as of 25.09.2020.

 

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e.g. To see how much you could save in two years by switching mortgages,  set the slider to 2.

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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 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 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 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 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.

How can I get ANZ home loan pre-approval?

Shopping for a new home is an exciting experience and getting a pre-approval on the loan may give you the peace of mind that you are looking at properties within your budget. 

At the time of applying for the ANZ Bank home loan pre-approval, you will be required to provide proof of employment and income, along with records of your savings and debts.

An ANZ home loan pre-approval time frame is usually up to three months. However, being pre-approved doesn’t necessarily mean you will get your home loan. Other factors could lead to your home loan application being rejected, even with a prior pre-approval. Some factors include the property evaluation not meeting the bank’s criteria or a change in your financial circumstances.

You can make an application for ANZ home loan pre-approval online or call on 1800100641 Mon-Fri 8.00 am to 8.00 pm (AEST).

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.