Lenders slash mortgage rates while Australians top up offset accounts

Lenders slash mortgage rates while Australians top up offset accounts

Average home loan interest rates have declined by between 33 and 45 basis points over the last quarter, according to the Reserve Bank of Australia (RBA). While this has reportedly led more Australians to refinance their mortgages and top up their offset accounts, fewer new home loans have been recorded.

Interest rates take a dive

According to the RBA’s Statement on Monetary Policy, interest rates on variable and fixed rate housing loans have declined substantially since the end of February 2020.

The biggest declines were recorded for new fixed rate housing loans, which fell by around 65 basis points during this period (more than the average shown in the table, due to delays associated with the expiry of existing fixed rate loan periods).

Average outstanding housing rates - June 2020

Loan type Interest rate  Change since February 2020 (basis points) 
Variable rate loans - owner-occupier  3.24%  -33
Variable rate loans - investor 3.61% -35
All variable rate loans 3.37% -34
Fixed rate loans - owner-occupier 3.28% -45
Fixed rate loans - investor 3.64% -37
Principal and interest* 3.28% -35
Interest-only* 3.88% -33

*weighted average across fixed and variable rate loans

Sources: APRA, RBA

The RBA also recorded a strong swing towards fixed-rate home loans in the most recent quarter.

RateCity has also observed fixed rates dive in recent months, with some of the lowest fixed rates on record being released.

Aussies top up their offset accounts

While many Australian mortgage holders saw their interest rates slashed over the June quarter, or were able to put their loan on a 6-month mortgage holiday, the RBA found that many of these mortgage holders also put more of their spare cash into their offset accounts.

According to the RBA, Aussies deposited the most into their offset accounts in April and May, when:

  1. Many mortgage holders were saving money for precautionary reasons, and;
  2. More containment measures were introduced to limit the spread of the virus, reducing opportunities for spending.

The RBA also mentioned money from the early release of superannuation as possibly contributing to higher offset account balances.

Fewer new loans this quarter

The RBA also found that new housing loan commitments have declined since the end of March this year. This was attributed to several causes, including:

  1. Less demand for new housing finance, partially due to uncertainty associated with the pandemic, and;
  2. Tightening lending standards, with lenders taking more time to assess loan applications, some of which are requiring more recent verification of income than previously, or lower maximum LVRs.

What this all means to you

If you’re in the market for a home loan, it’s clear there are a lot of low-rate options available. However, instead of going straight to the offer with the lowest interest rate, it’s important to also check what features and benefits the lender offers, and what terms and conditions may apply. 

As recorded by the RBA, fixed-rate home loans have seen some of the deepest falls in recent months. Choosing a home loan with a low fixed rate could let you enjoy consistently low repayments for as long as the fixed term lasts. Just remember that your loan will revert to the lender’s variable rate once this fixed term is up, and if you decide to refinance early, you could be stuck paying expensive break fees.

If you’re looking to build up an emergency fund for the future, one option could be to deposit your spare cash in your home loan’s offset account. This can help shrink your home loan interest charges, which can in turn help you clear your debt faster and pay off your property sooner. Keep in mind that offset accounts tend to be more commonly available with variable rate home loans than fixed rate options.

Whether you’re applying for a new home loan or refinancing your existing mortgage, it’s important to pay close attention to the lender’s eligibility criteria. To qualify for some of the lowest interest rates, you may need to provide a larger house deposit, or provide extra proof of income to demonstrate that you can comfortably afford the home loan.

If you’re unsure which home loan may be right for you, or which mortgage lender is likely to accept you application, contacting a mortgage broker for expert advice could be an option to consider.

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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.

Does the Home Loan Rate Promise apply to discounted interest rate offers, such as honeymoon rates?

No. Temporary discounts to home loan interest rates will expire after a limited time, so they aren’t valid for comparing home loans as part of the Home Loan Rate Promise.

However, if your home loan has been discounted from the lender’s standard rate on a permanent basis, you can check if we can find an even lower rate that could apply to you.

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 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 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 the Home Loan Rate Promise?

The Home Loan Rate Promise is RateCity putting its money where its mouth is. We believe that too many Australians are paying too much for their home loans. We’re so confident we can help Aussies save money, if we can’t beat your current rate, we’ll give you a $100 gift card.*

There are two reasons it pays to check your rate with the Home Loan Rate Promise:

  • You can find out how much you could save on your home loan by switching to a loan with a lower interest rate
  • If we can’t beat your current rate, you can claim a $100 gift card with our Home Loan Rate Promise*

How does ANZ calculate early repayment costs?

If you have a fixed interest home loan, you’ll pay ANZ home loan early exit fees for partial or full repayment of the loan amount before the end of the fixed interest rate duration. These fees are also payable if you switch to another variable or fixed-rate loan.

The ANZ mortgage early exit fees can vary and you can get an estimate from the lender before you decide to prepay the loan. However, the exact early repayment cost can be determined when you prepay the loan.

The early exit fees are calculated after considering factors like the prepayment amount, the period left before the fixed-rate duration ends, and the change in the market rates since the beginning of the fixed-rate period. The early exit fees may not be charged if you’re paying off a smaller amount. You can check with ANZ to see how much you’ll have to pay.

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.

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. 

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.

How do you determine which home loan rates/products I’m shown?

When you check your home loan rate, you’ll supply some basic information about your current loan, including the amount owing on your mortgage and your current interest rate.

We’ll compare this information to the home loan options in the RateCity database and show you which home loan products you may be eligible to apply for.

 

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.