How low can a home loan go?

How low can a home loan go?

Interest rates for home loans are at all-time lows, with large and small banks and non-bank mortgage lenders racing to set new record lows. But with some economists forecasting that the Reserve Bank of Australia (RBA) could further cut the national cash rate at its October or November meeting, possibly into negative rates for the first time in history, what could this mean for paying off your house?

If you have a fixed interest rate…

…nothing much will likely happen for you.

Fixing your interest rate means that you’ll keep making the same interest payments for the duration of the fixed term, regardless of RBA updates or any other factors that may affect variable mortgage rates.

A lower cash rate could lead to mortgage lenders introducing cheaper fixed rate home loan offers. However, these will be available to new customers, with existing fixed rate customers not receiving a discount.

If you want to benefit from a lower interest rate, you may need to refinance your fixed rate home loan and switch to another loan. Of course, refinancing from a fixed rate deal could involve paying break costs, which could make refinancing cost more than it may be worth to you.

If you have a variable interest rate…

…you may be able to benefit from lower rates, though it’s not yet certain what kind of difference this could make to your wallet.

If the cash rate drops, banks and mortgage lenders often drop their variable home loan interest rates, sooner or later. This could allow borrowers to save a little money on their monthly payments, or to start paying off their properties a little bit faster.

It’s not yet clear quite how low home loan interest rates could go if the RBA was to cut the cash rate. Despite no cuts to the cash rate since March 2020, plenty of mortgage lenders have been recently slashing interest rates out of cycle from the RBA.

Recent analysis from RateCity’s database shows:

    • 47 lenders cut new customer variable rates in the last two months.
    • 34 lenders cut fixed rates in the last two months.
    • Lowest variable rate is 1.89 per cent (60 per cent LVR).
    • Lowest 2- and 3-year fixed rates are 1.99 per cent.
    • 11 lenders offer rates below 2 per cent.

As well as cutting rates, some banks could potentially start slashing fees and charges (including LMI fees) or offering introductory bonuses and incentives, such as cashback deals.

Also, keep in mind that even if your mortgage lender gives you a discount on your home loan interest charges, this may not be the lowest variable rate they have available. Many banks and mortgage lenders offer their lowest rate deals to new customers only. If you want to reap the full potential benefits of an RBA cash rate cut, it could be worth looking at whether you’re in a position to refinance your loan, possibly with another lender.

What if the RBA goes into negative rates?

It’s possible that the RBA could choose to take Australia’s cash rate into negative figures, to help encourage Australians to borrow, invest, and spend money rather than keeping it in savings accounts or term deposits. While negative rates have been previously introduced to other countries in the past, such as Denmark, Japan, Sweden and Switzerland, this is largely uncharted territory in Australia.

A negative cash rate opens up the possibility for negative home loan interest rates, where a lender will effectively pay you to borrow money. For example, when Jyske Bank in Denmark introduced a negative rate home loan, when borrowers made their monthly repayments, their debt would be reduced by more than what they paid. Of course, there are still fees and other charges to consider and budget for with loans like these.

For savers, negative interest rates could potentially lead to a situation where not only do you earn no interest on the money you deposit, but you also need to pay fees and charges for keeping your money in the bank. This could potentially mean finding yourself with less money in your savings account than you started with unless you make regular deposits, which could be a tough situation for Australians who rely on savings, such as some pensioners.

RBA Governor, Dr Philip Lowe, has previously gone on record saying that negative interest rates in Australia are “extraordinarily unlikely”. However, it remains to be seen whether Australia’s recession and the ongoing effects of the pandemic could influence the RBA board’s future decisions.

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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 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.

What is the best interest rate for a mortgage?

The fastest way to find out what the lowest interest rates on the market are is to use a comparison website.

While a low interest rate is highly preferable, it is not the only factor that will determine whether a particular loan is right for you.

Loans with low interest rates can often include hidden catches, such as high fees or a period of low rates which jumps up after the introductory period has ended.

To work out the best value for money, have a look at a loan’s comparison rate and read the fine print to get across all the fees and charges that you could be theoretically charged over the life of the loan.

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 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 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).

Interest Rate

Your current home loan interest rate. To accurately calculate how much you could save, an accurate interest figure is required. If you are not certain, check your bank statement or log into your mortgage account.

How much of the RBA rate cut do lenders pass on to borrowers?

When the Reserve Bank of Australia cuts its official cash rate, there is no guarantee lenders will then pass that cut on to lenders by way of lower interest rates. 

Sometimes lenders pass on the cut in full, sometimes they partially pass on the cut, sometimes they don’t at all. When they don’t, they often defend the decision by saying they need to balance the needs of their shareholders with the needs of their borrowers. 

As the attached graph shows, more recent cuts have seen less lenders passing on the full RBA interest rate cut; the average lender was more likely to pass on about two-thirds of the 25 basis points cut to its borrowers.  image002

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.

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. 

Can I get a home loan if I am on an employment contract?

Some lenders will allow you to apply for a mortgage if you are a contractor or freelancer. However, many lenders prefer you to be in a permanent, ongoing role, because a more stable income means you’re more likely to keep up with your repayments.

If you’re a contractor, freelancer, or are otherwise self-employed, it may still be possible to apply for a low-doc home loan, as these mortgages require less specific proof of income.

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.