RateCity.com.au
powering smart financial decisions

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

LenderAdvertised rate
VariableHomestar Finance

2.49%

1-year fixedHomestar Finance

2.18%

2-year fixedPolice Credit Union

2.19%

3-year fixedHume Bank (Local post codes only)

1.99%

5-year fixedHSBC

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 variableVariable with offset2yr fixed3yr fixed5yr 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.

Did you find this helpful? Why not share this news?

Fact Checked -

This article was reviewed by Personal Finance Editor Alex Ritchie before it was published as part of RateCity's Fact Check process.

Advertisement

RateCity
ratecity-newsletter

Money Health Newsletter

Subscribe for news, tips and expert opinions to help you make smarter financial decisions

By signing up, you agree to the RateCity Privacy Policy, Terms of Use and Disclaimer.

Advertisement

Learn more about home loans

When does Commonwealth Bank charge an early exit fee?

When you take out a fixed interest home loan with the Commonwealth Bank, you’re able to lock the interest for a particular period. If the rates change during this period, your repayments remain unchanged. If you break the loan during the fixed interest period, you’ll have to pay the Commonwealth Bank home loan early exit fee and an administrative fee.

The Early Repayment Adjustment (ERA) and Administrative fees are applicable in the following instances:

  • If you switch your loan from fixed interest to variable rate
  • When you apply for a top-up home loan
  • If you repay over and above the annual threshold limit, which is $10,000 per year during the fixed interest period
  • When you prepay the entire outstanding loan balance before the end of the fixed interest duration.

The fee calculation depends on the interest rates, the amount you’ve repaid and the loan size. You can contact the lender to understand more about what you may have to pay. 

Cash or mortgage – which is more suitable to buy an investment property?

Deciding whether to buy an investment property with cash or a mortgage is a matter or personal choice and will often depend on your financial situation. Using cash may seem logical if you have the money in reserve and it can allow you to later use the equity in your home. However, there may be other factors to think about, such as whether there are other debts to pay down and whether it will tie up all of your spare cash. Again, it’s a personal choice and may be worth seeking personal advice.

A mortgage is a popular option for people who don’t have enough cash in the bank to pay for an investment property. Sometimes when you take out a mortgage you can offset your loan interest against the rental income you may earn. The rental income can also help to pay down the 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 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 are the features of home loans for expats from Westpac?

If you’re an Australian citizen living and working abroad, you can borrow to buy a property in Australia. With a Westpac non-resident home loan, you can borrow up to 80 per cent of the property value to purchase a property whilst living overseas. The minimum loan amount for these loans is $25,000, with a maximum loan term of 30 years.

The interest rates and other fees for Westpac non-resident home loans are the same as regular home loans offered to borrowers living in Australia. You’ll have to submit proof of income, six-month bank statements, an employment letter, and your last two payslips. You may also be required to submit a copy of your passport and visa that shows you’re allowed to live and work abroad.

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 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 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.

Why does Westpac charge an early termination fee for home loans?

The Westpac home loan early termination fee or break cost is applicable if you have a fixed rate home loan and repay part of or the whole outstanding amount before the fixed period ends. If you’re switching between products before the fixed period ends, you’ll pay a switching break cost and an administrative fee. 

The Westpac home loan early termination fee may not apply if you repay an amount below the prepayment threshold. The prepayment threshold is the amount Westpac allows you to repay during the fixed period outside your regular repayments.

Westpac charges this fee because when you take out a home loan, the bank borrows the funds with wholesale rates available to banks and lenders. Westpac will then work out your interest rate based on you making regular repayments for a fixed period. If you repay before this period ends, the lender may incur a loss if there is any change in the wholesale rate of interest.

When do mortgage payments start after settlement?

Generally speaking, your first mortgage payment falls due one month after the settlement date. However, this may vary based on your mortgage terms. You can check the exact date by contacting your lender.

Usually your settlement agent will meet the seller’s representatives to exchange documents at an agreed place and time. The balance purchase price is paid to the seller. The lender will register a mortgage against your title and give you the funds to purchase the new home.

Once the settlement process is complete, the lender allows you to draw down the loan. The loan amount is debited from your loan account. As soon as the settlement paperwork is sorted, you can collect the keys to your new home and work your way through the moving-in checklist.

How long can you fix a home loan rate for?

Most lenders should let you fix your interest rate for anywhere between one and five years. While rare, a few lenders may offer fixed rate terms for as long as 10 years.

Fixing your home loan interest rate for a longer term can keep your budgeting fairly straightforward, as you shouldn't have to factor in changes to your mortgage repayments if variable rates change, such as when the Reserve Bank of Australia (RBA) changes its rates at its monthly meeting. Additionally, if variable rates rise during your fixed rate term, you can continue to pay the lower fixed rate until the fixed term ends, potentially saving you some money.

Of course, a longer fixed term also means a longer length of time where you may have less flexibility in your home loan repayments. It’s also a longer period where you won’t be able to refinance your mortgage without paying break fees. If variable rates were to fall during this period, you may also be stuck paying a higher fixed rate for a longer period.

Can you borrow the deposit for a home loan?

Most lenders will want the majority of your home loan deposit to be made up of ‘genuine savings’ which is income earned from your job. While a small number of lenders may let you use a personal loan or a credit card to help cover the cost of your deposit, this may potentially cost you more in interest, and put your finances at higher risk.

If you haven’t saved a full deposit, it may be possible to effectively borrow the deposit for a mortgage with the help of a guarantor. This is usually a parent of other family member who guarantees your mortgage with the equity in their own property.

It may also be possible to borrow the money for a home loan deposit from a family member (e.g. the Bank of Mum & Dad) or a friend, provided you draw up a formal legal agreement to pay this money back, showing your mortgage lender that you’re taking responsibility.