Mortgages got dearer throughout 2017

Home loan interest rates have risen steadily throughout 2017 – even though the Reserve Bank hasn’t increased the official cash rate since 2010.

This increase in interest rates has occurred for both owner-occupiers and investors, and for both variable loans and fixed-rate loans, according to an analysis of the 4,000-plus loans listed on RateCity.

On 1 January, the average variable rate for owner-occupiers was 4.32 per cent. By 1 December, it had climbed to 4.47 per cent – an increase of 15 basis points.

Date Rate
1 January 4.32%
1 February 4.35%
1 March 4.35%
1 April 4.37%
1 May 4.39%
1 June 4.41%
1 July 4.44%
1 August 4.46%
1 September 4.47%
1 October 4.46%
1 November 4.45%
1 December 4.47%

During the same period, the average variable rate for investors rose from 4.59 per cent to 4.93 per cent – an increase of 34 basis points.

Date Rate
1 January 4.59%
1 February 4.61%
1 March 4.62%
1 April 4.67%
1 May 4.74%
1 June 4.78%
1 July 4.84%
1 August 4.89%
1 September 4.91%
1 October 4.90%
1 November 4.90%
1 December 4.93%

The reason interest rates have been rising is because lenders – at the urging of APRA, the banking regulator – have been trying to remove risk from the mortgage market by making it harder for fringe borrowers to qualify for loans.

Investment loans are regarded as riskier than owner-occupied loans, which is why rates for the former have risen faster than the latter.

As a result, the gap between the average variable owner-occupied rate and the average variable investment rate increased from 27 basis points to 46 basis points.

Date Owner-occupied Investment Gap
1 January 4.32% 4.59% 0.27%
1 February 4.35% 4.61% 0.26%
1 March 4.35% 4.62% 0.27%
1 April 4.37% 4.67% 0.30%
1 May 4.39% 4.74% 0.35%
1 June 4.41% 4.78% 0.37%
1 July 4.44% 4.84% 0.40%
1 August 4.46% 4.89% 0.43%
1 September 4.47% 4.91% 0.44%
1 October 4.46% 4.90% 0.44%
1 November 4.45% 4.90% 0.45%
1 December 4.47% 4.93% 0.46%

Fixed rates also got dearer in 2018

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A similar trend played out in the fixed-rate market during 2017.

Focusing on three-year fixed rates, the average interest rate for owner-occupiers moved from 4.08 per cent to 4.24 per cent – an increase of 16 basis points.

Date Rate
1 January 4.08%
1 February 4.11%
1 March 4.14%
1 April 4.17%
1 May 4.21%
1 June 4.21%
1 July 4.21%
1 August 4.23%
1 September 4.22%
1 October 4.22%
1 November 4.23%
1 December 4.24%

At the same time, three-year fixed rates for investors climbed by 30 basis points, from 4.26 per cent to 4.56 per cent.

Date Rate
1 January 4.26%
1 February 4.30%
1 March 4.32%
1 April 4.37%
1 May 4.43%
1 June 4.45%
1 July 4.49%
1 August 4.53%
1 September 4.55%
1 October 4.55%
1 November 4.55%
1 December 4.56%

During the course of 2017, the gap between three-year rates for owner-occupiers and investors widened from 18 basis points to 32 basis points.

Date Owner-occupied Investment Gap
1 January 4.08% 4.26% 0.18%
1 February 4.11% 4.30% 0.19%
1 March 4.14% 4.32% 0.18%
1 April 4.17% 4.37% 0.20%
1 May 4.21% 4.43% 0.22%
1 June 4.21% 4.45% 0.24%
1 July 4.21% 4.49% 0.28%
1 August 4.23% 4.53% 0.30%
1 September 4.22% 4.55% 0.33%
1 October 4.22% 4.55% 0.33%
1 November 4.23% 4.55% 0.32%
1 December 4.24% 4.56% 0.32%

What’s ahead for rates in 2018?

The RBA would like to hike rates at least once in 2018, but right now it seems impossible to see how they might achieve this.

Inflation is going in the wrong direction, household debt continues to climb, while wages growth remains steadfastly on a well-trodden path to nowhere.

Looking at this data, a rate hike in 2018 is improbable. Moreover, if inflation continues to fall at the same time wages continue to stall, then the RBA might be forced to play one of their last trump cards and cut rates to yet another record low.

This, however, does not mean rates will remain stable.

Our banks have a big year ahead of them with a landmark Royal Commission, the federal government’s bank levy to hand over and whatever new hoops APRA put on the table. If they’re squeezed too tightly, home owners may find themselves footing some, if not all, of the bill.

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Learn more about home loans

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 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 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 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 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 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 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.

How do I know if I have to pay LMI?

Each lender has its own policies, but as a general rule you will have to pay lender’s mortgage insurance (LMI) if your loan-to-value ratio (LVR) exceeds 80 per cent. This applies whether you’re taking out a new home loan or you’re refinancing.

If you’re looking to buy a property, you can use this LMI calculator to work out how much you’re likely to be charged in LMI.

What happens when you default on your mortgage?

A mortgage default occurs when you are 90 days or more behind on your mortgage repayments. Late repayments will often incur a late fee on top of the amount owed which will continue to gather interest along with the remaining principal amount.

If you do default on a mortgage repayment you should try and catch up in next month’s payment. If this isn’t possible, and missing payments is going to become a regular issue, you need to contact your lender as soon as possible to organise an alternative payment schedule and discuss further options.

You may also want to talk to a financial counsellor. 

How personalised is my rating?

Real Time Ratings produces instant scores for loan products and updates them based what you tell us about what you’re looking for in a loan. In that sense, we believe the ratings are as close as you get to personalised; the more you tell us, the more we customise to ratings to your needs. Some borrowers value flexibility, while others want the lowest cost loan. Your preferences will be reflected in the rating. 

We also take a shorter term, more realistic view of how long borrowers hold onto their loan, which gives you a better idea about the true borrowing costs. We take your loan details and calculate how much each of the relevent loans would cost you on average each month over the next five years. We assess the overall flexibility of each loan and give you an easy indication of which ones are likely to adjust to your needs over time. 

How often is your data updated?

We work closely with lenders to get updates as quick as possible, with updates made the same day wherever possible.

How can I get a home loan with no deposit?

Following the Global Financial Crisis, no-deposit loans, as they once used to be known, have largely been removed from the market. Now, if you wish to enter the market with no deposit, you will require a property of your own to secure a loan against or the assistance of a guarantor.

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