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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Learn more about home loans

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.

Do mortgage brokers need a consumer credit license?

In Australia, mortgage brokers are defined by law as being credit service or assistance providers, meaning that they help borrowers connect with lenders. Mortgage brokers may not always need a consumer credit license however if they’re operating solo they will need an Australian Credit License (ACL). Further, they may also need to comply with requirements asking them to mention their license number in full.

Some mortgage brokers can be “credit representatives”, or franchisees of a mortgage aggregator. In this case, if the aggregator has a license, the mortgage broker need not have one. The reasoning for this is that the franchise agreement usually requires mortgage brokers to comply with the laws applicable to the aggregator. If you’re speaking to a mortgage broker, you can ask them if they receive commissions from lenders, which is a good indicator that they need to be licensed. Consider requesting their license details if they don’t give you the details beforehand. 

You should remember that such a license protects you if you’re given incorrect or misleading advice that results in a home loan application rejection or any financial loss. Brokers are regulated by the Australian Securities & Investment Commission (ASIC), as per the National Consumer Credit Protection (NCCP) Act. 

What are the responsibilities of a mortgage broker?

Mortgage brokers act as the go-between for borrowers looking for a home loan and the lenders offering the loan. They offer personalised advice to help borrowers choose the right home loan for their needs.

In Australia, mortgage brokers are required by law to carry an Australian Credit License (ACL) if they offer credit assistance services. Which is the legal term for guidance regarding the different kinds of credit offered by lenders, including home loan mortgages. They may not need this license if they are working for an aggregator, for instance, as a franchisee. In both these situations, they need to comply with the regulations laid down by the Australian Securities and Investments Commission (ASIC).

These regulations, which are stipulated by Australian legislation, require mortgage brokers to comply with what are called “responsible lending” and “best interest” obligations. Responsible lending obligations mean brokers have to suggest “suitable” home loans. This means loans that you can easily qualify for,  actually meet your needs, and don’t prove unnecessarily challenging for you.

Starting 1 January 2021, mortgage brokers must comply with best interest obligations in addition to responsible lending obligations. These require mortgage brokers to act in the best interest of their customers and also requires them to prioritise their customers’ interests over their own. For instance, a mortgage broker may not recommend a lender who gives them a commission if that lender’s home loan offer does not benefit that particular customer.

How to break up with your mortgage broker

If you find a mortgage broker giving you generic advice or trying to sell you a competitive offer from an unsuitable lender, you might be better off  breaking up with the mortgage broker and consulting someone else. Breaking up with a mortgage broker can be done over the phone, or via email. You can also raise a complaint, either with the broker’s aggregator or with the Australian Financial Complaints Authority as necessary.

As licensed industry professionals, mortgage brokers have the responsibility of giving you accurate advice so that you know what to expect when you apply for a home loan. You may have approached the mortgage broker, for instance, because you have questions about the terms of a home loan a lender offered you. 

You should remember that mortgage brokers are obliged by law to act in your best interests and as part of complying with The Australian Securities and Investments Commission’s (ASIC) regulations. If you feel you didn’t get the right advice from the mortgage broker, or that you lost money as a result of accepting the broker’s suggestions regarding a lender or home loan offer, you can file a complaint with the ASIC and seek compensation. 

When you first speak to a mortgage broker, consider asking them about their Lender Panel, which is the list of lenders they usually recommend and who may pay them a commission. This information can help you decide if the advice they give you has anything to do with the remuneration they may receive from one or more lenders.

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.

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. 

Do other comparison sites offer the same service?

Real Time RatingsTM is the only online system that ranks the home loan market based on your personal borrowing preferences. Until now, home loans have been rated based on outdated data. Our system is unique because it reacts to changes as soon as we update our database.