Mortgage rate gap between owner-occupiers and investor home loan rates shrinks

Mortgage rate gap between owner-occupiers and investor home loan rates shrinks

The rift between owner-occupier and investor mortgage rates is narrowing, and investors can expect this to continue as new investor lending dwindles.

Investor borrowers could be paying up to 0.49 per cent more in interest rates than borrowers who live in their own home, according to RateCity analysis.

But two years ago, the maximum gap between investor rates and owner-occupier rates was 0.60 per cent.

Looking at overall rates across fixed and variable, the difference between the average mortgage rates for owner-occupiers and for investors is as small as 0.22 per cent, down from 0.32 per cent in August 2018.

Lenders have been ramping up the home loan rate war, but this hasn’t been limited to owner-occupier interest rates.

In the past two months, 47 lenders have made out-of-cycle cuts to interest rates for investor borrowers, RateCity figures showed. The last time the Reserve Bank of Australia (RBA) lowered the official cash rate was in March.

Among the lenders which slashed their investor mortgage rates were NAB, Macquarie Bank, Bank of Queensland and online-only lender Athena Home Loans.

Why is the home loan rate gap narrowing?

While many are used to seeing investor mortgage rates being higher than owner-occupier rates, Sally Tindall, research director at RateCity, said this hasn’t always been the case.

“Prior to 2015, most banks charged a flat rate for each home loan product regardless of whether you lived in your home or rented it out,” she said.

This changed when the Australian Prudential Regulation Authority (APRA) asked banks to cap the growth in investment loans to 10 per cent a year, due to a rise in investor loans that concerned the regulator.

“APRA’s cap on investor lending has since been removed and while investors are still paying more than owner-occupiers, the gap has narrowed as banks move to welcome investors back on to their books,” Ms Tindall said.

But growth in investor lending has been slowing. New investor loans are down by 29 per cent from the same time two years ago, according to the Australian Bureau of Statistics (ABS). This is equivalent to a $1.8 billion drop in investor lending compared to June 2018, Ms Tindall said, which is creating a hole in bank revenue.

“With a shrinking pool of new home loans, banks are being forced to compete harder for the ones on offer, including any existing investors that they can wrangle away from a competitor. As a result, we’re increasingly seeing record low investor rates on offer for new customers,” Ms Tindall said.

Will the gap between investor rates and owner-occupier rates keep closing?

Ms Tindall expected the interest rate gap between investor and owner-occupiers to continue narrowing.

“It’s a very different environment to five years ago when banks were actively discouraging new investor loans. It’s also one of the few loan types that still has fat to cut when it comes to rates,” she said.

While Ms Tindall said this competition is an advantage for investors, especially those who are in a position to refinance, they should not expect banks to approve any investment loan.

“They’re going to want quality investments, ideally where the rental return is still strong and the owner has a good track record of paying their loan on time,” she said.

What should investors do to take advantage of the current environment? 

Existing investor borrowers who have locked in their interest rates overpaid the most on their mortgages in June compared with new borrowers, the latest RBA data on housing lending rates suggested.

New investor customers on fixed-rate loans of three years or less are paying 1.01 per cent less than old customers on the same loan type, while existing customers who are locked in for longer than three years are paying 0.95 per cent more.

With this in mind, some investors may be wanting to refinance. But those looking to buy a new investment property or refinance their investment mortgage should be prepared to go under the microscope, as it’s anticipated that banks will be increasingly cautious about the amount of income a property is likely to generate. This could affect how much an investor is allowed to borrow, and may even deter some would-be investors from dipping their toes into the property market. 

Despite the increased scrutiny, investor home loan rates are among the lowest the market has seen, with Homestar Finance providing the lowest variable investor rate on the RateCity database at 2.49 per cent (2.52 per cent comparison rate). For fixed investor rates, UBank has the most competitive option at 2.29 per cent (2.74 per cent comparison rate).

Investor rates from 27 lenders have dipped below 2.5 per cent, while 92 lenders have investor rates below 3 per cent. 

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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 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 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 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.

Does Australia have no-deposit home loans?

Australia no longer has no-deposit home loans – or 100 per cent home loans as they’re also known – because they’re regarded as too risky.

However, some lenders allow some borrowers to take out mortgages with a 5 per cent deposit.

Another option is to source a deposit from elsewhere – either by using a parental guarantee or by drawing out equity from another property.

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.

How can I calculate interest on my home loan?

You can calculate the total interest you will pay over the life of your loan by using a mortgage calculator. The calculator will estimate your repayments based on the amount you want to borrow, the interest rate, the length of your loan, whether you are an owner-occupier or an investor and whether you plan to pay ‘principal and interest’ or ‘interest-only’.

If you are buying a new home, the calculator will also help you work out how much you’ll need to pay in stamp duty and other related costs.

How much deposit will I need to buy a house?

A deposit of 20 per cent or more is ideal as it’s typically the amount a lender sees as ‘safe’. Being a safe borrower is a good position to be in as you’ll have a range of lenders to pick from, with some likely to offer up a lower interest rate as a reward. Additionally, a deposit of over 20 per cent usually eliminates the need for lender’s mortgage insurance (LMI) which can add thousands to the cost of buying your home.

While you can get a loan with as little as 5 per cent deposit, it’s definitely not the most advisable way to enter the home loan market. Banks view people with low deposits as ‘high risk’ and often charge higher interest rates as a precaution. The smaller your deposit, the more you’ll also have to pay in LMI as it works on a sliding scale dependent on your deposit size.

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.

Is there a limit to how many times I can refinance?

There is no set limit to how many times you are allowed to refinance. Some surveyed RateCity users have refinanced up to three times.

However, if you refinance several times in short succession, it could affect your credit score. Lenders assess your credit score when you apply for new loans, so if you end up with bad credit, you may not be able to refinance if and when you really need to.

Before refinancing multiple times, consider getting a copy of your credit report and ensure your credit history is in good shape for future refinances.

I have a poor credit rating. Am I still able to get a mortgage?

Some lenders still allow you to apply for a home loan if you have impaired credit. However, you may pay a slightly higher interest rate and/or higher fees. This is to help offset the higher risk that you may default on your repayments.

I can't pick a loan. Should I apply to multiple lenders?

Applying for home loans with multiple lenders at once can affect your credit history, as multiple loan applications in short succession can make you look like a risky borrower. Comparing home loans from different lenders, assessing their features and benefits, and making one application to a preferred lender may help to improve your chances of success