The lowest home loan rates come with a catch

The lowest home loan rates come with a catch

Home loan customers rejoice - there’s a new lowest variable home loan rate on the RateCity database, but it comes with a catch.

Challenger lender, Reduce Home Loans, is offering an historic low variable rate of 2.25 per cent for owner-occupiers. However, new customers will need a maximum LVR of 60 per cent to qualify.

  • Loan to Value Ratio (LVR) is a measurement of how much you’re borrowing in a home loan, compared to the value of the property itself. For example, if a property is worth $500,000 and you’ve saved a deposit of $100,000, you’ll need to borrow 80 per cent of the property’s value ($400,000). This would make your LVR 80 per cent.

Competition may be heating up in the home loan market, as this new loan and rock-bottom rate comes after Westpac announced on Friday it was cutting its basic variable rate to 2.69 per cent.

This cut makes Westpac’s rate the lowest variable home loan rate offered by a big four bank – but only customers with LVRs of 70 per cent can qualify.

In fact, RateCity research has found that the 3 lowest owner-occupier, variable home loan rates on its database all require a maximum LVR of 60 per cent.

Low rates for big deposits

RateCity figures show that of the top 5 lowest variable home loan rates on its database, only one has a maximum LVR above 70 per cent.

Lowest variable home loans

Lender Home loan Rate Comparison rate Max LVR
Reduce Home Loans Economizer Variable Home Loan

2.25%

2.42%

60%

Homestar Finance Star Gold Home Loan

2.29%

2.32%

60%

Freedom Lend Freedom Variable Home Loan Special

2.29%

2.36%

60%

Tic Toc Live-in Variable Loan

2.39%

2.40%

90%

Pacific Mortgage Group Standard Variable Home Loan

2.39%

2.39%

70%

Source: RateCity.com.au. Notes: figures based on $350,000 variable, owner-occupier home loan paying principal and interest.

This means that for would-be-buyers, to qualify for the most competitive loans you will need a deposit of at least 40 per cent. For homeowners looking to refinance, you will need to have at least 40 per cent equity in your property.

This is not an unusual requirement for lenders, as the greater the size of your deposit, or the more equity in your property, the less risky you are seen as a borrower and less likely you’ll have to pay for Lenders Mortgage Insurance.

  • The LVR is also used to calculate whether or not you will need to pay for Lender’s Mortgage Insurance (LMI). This is a type of insurance policy that can cost tens of thousands of dollars and protects your lender if you default on the loan. Typically, if a home loan has an LVR higher than 80 per cent (deposit less than 20 per cent) you will need to pay this insurance as you are seen as a riskier borrower.

According to the Sydney Morning Herald, last year some of Australia’s biggest banks advised brokers they would moving towards “LVR pricing”, meaning they would be offering percentage point discounts to interest rates on home loans with lower LVRs.

Australian home loan lenders are trying to bring lower-risk customers onto their books by offering them more competitive home loan rates. In an environment where regulatory bodies like the ACCC and ASIC are discouraging risky lending, it’s unsurprising that the lowest rates are being offered to the “safest” customers.

Could home loan rates fall below 2%?

Some borrowers may be wondering if Reduce Home Loan’s rock-bottom variable home loan rate of 2.25 per cent may be a sign that rates are headed even lower.

The answer may lie somewhere between the cash rate and how the big four banks compete.

The Reserve Bank of Australia (RBA) has kept the cash rate on hold at 0.25 per cent since March this year, with Governor Philip Lowe indicating that the RBA has no plans to cut to zero any time soon.

This means that we may be close to the bottom of the market for home loan rates. However, lenders may slash rates further as competition between the banks heats up.

RateCity research director, Sally Tindall, said the cuts from Westpac on Friday were designed to get “new business in the door.”

“Westpac Group’s home loan book has fallen month-on-month, according to the latest APRA statistics. They need new customers to keep moving in the right direction.”

Competition between the banks means we may see CommBank, NAB or ANZ follow suit. However, it’s more likely that challenger banks, similar to Reduce Home Loans, will be the ones putting out these lower rates to get new customers on the books.

These low rates are typically designed for new customers. If you’re not prepared to refinance you may want to consider haggling with your current lender for one of these lower rates.

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Learn more about home loans

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 low-deposit home loan?

A low-deposit home loan is a mortgage where you need to borrow more than 80 per cent of the purchase price – in other words, your deposit is less than 20 per cent of the purchase price.

For example, if you want to buy a $500,000 property, you’ll need a low-deposit home loan if your deposit is less than $100,000 and therefore you need to borrow more than $400,000.

As a general rule, you’ll need to pay LMI (lender’s mortgage insurance) if you take out a low-deposit home loan. You can use this LMI calculator to estimate your LMI payment.

How do I refinance my home loan?

Refinancing your home loan can involve a bit of paperwork but if you are moving on to a lower rate, it can save you thousands of dollars in the long-run. The first step is finding another loan on the market that you think will save you money over time or offer features that your current loan does not have. Once you have selected a couple of loans you are interested in, compare them with your current loan to see if you will save money in the long term on interest rates and fees. Remember to factor in any break fees and set up fees when assessing the cost of switching.

Once you have decided on a new loan it is simply a matter of contacting your existing and future lender to get the new loan set up. Beware that some lenders will revert your loan back to a 25 or 30 year term when you refinance which may mean initial lower repayments but may cost you more in the long run.

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.

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 loan-to-value ratio (LVR)?

A loan-to-value ratio (otherwise known as a Loan to Valuation Ratio or LVR), is a calculation lenders make to work out the value of your loan versus the value of your property, expressed as a percentage.   Lenders use this calculation to help assess your suitability for a home loan, and whether you need to pay lender’s mortgage insurance (LMI). As a general rule, most banks will require you to pay LMI if your loan-to-value ratio is 80 per cent or more.   LVR is worked out by dividing the loan amount by the value of the property. If you are looking for a quick ball-park estimate of LVR, the size of your deposit is a good indicator as it is directly proportionate to your LVR. For instance, a loan with an LVR of 80 per cent requires a deposit of 20 per cent, while a 90 per cent LVR requires 10 per cent down payment. 

LOAN AMOUNT / PROPERTY VALUE = LVR%

While this all sounds simple enough, it is worth doing a more accurate calculation of LVR before you commit to buying a place as there are some traps to be aware of. Firstly, the ‘loan amount’ is the price you paid for the property plus additional costs such as stamp duty and legal fees, minus your deposit amount. Secondly, the ‘property value’ is determined by your lender’s valuation of the property, not the price you paid for it, and sometimes these can differ so where possible, try and get your bank to evaluate the property before you put in an offer.

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).

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. 

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.

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 debt service ratio?

A method of gauging a borrower’s home loan serviceability (ability to afford home loan repayments), the debt service ratio (DSR) is the fraction of an applicant’s income that will need to go towards paying back a loan. The DSR is typically expressed as a percentage, and lenders may decline loans to borrowers with too high a DSR (often over 30 per cent).

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.

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.