What would negative interest rates mean for your finances?

What would negative interest rates mean for your finances?

With only 10 basis points separating the Reserve Bank of Australia’s cash rate from zero, and the economic impacts of COVID-19 likely to be felt for a long time, we may see negative interest rates in the future.

And as a Denmark bank announced yesterday that it was now offering 20-year home loans at zero per cent interest, you may be wondering what would a negative interest rate environment look like in Australia?

Would your lender be paying you to have a home loan with them? Would your savings account provider charge you for the privilege of storing your money?

Without a crystal ball it’s hard to say if, or when this may happen. But if the cash rate were to plummet to, or below, zero, it’s worth exploring how it might affect your finances.

What are negative interest rates?

First and foremost, we need to look at what most significantly impacts interest rates – the cash rate. The Reserve Bank of Australia meets to set the cash rate on the first Tuesday of each month (except for January). They may make the decision to raise, lower or hold the cash rate on that date.

Banks, credit unions, neobanks and pretty much any licenced institution offering financial products may use this to dictate their own interest rates. A cut to the cash rate typically means a similar cut to variable home loan mortgage rates, term deposit rates and saving account rates. On the flip side, an increase would indicate to providers to lift these rates.

If the cash rate were to plunge below zero, this may mean that providers will move interest rates into negative territory.

This has happened in other countries before. Several central banks, including those in Japan, Denmark, Sweden, Switzerland and the European Central Bank have seen rates plunge into the negatives. This practice is done typically to try and kickstart economies that have been declining.

Put simply, the idea is that negative rates will encourage businesses to borrow more money and invest it back into the economy. But this unfortunately can backfire, leading to an increase in cash hoarding as everyday customers feel too uncertain about the economy to spend, and also fear their deposits or cash aren’t earning real returns.

The biggest concerns are that negative rates would impact a bank’s profitability, and that savers may start hiding cash under their mattress to avoid paying their bank to hold their money.

After all, why keep money in a bank that may charge you for the benefit of keeping it there?

What happens to your mortgage?

So, what actually may happen to your mortgage if we entered an environment of negative interest rates?

If the cash rate were to cut to zero or below, and you were on a fixed-rate home loan, nothing would change for you right away. But there may be long-term consequences, depending on what the market looks like once your fixed term has ended.

While variable-rate home loan customers may see immediate change in their mortgage repayments, there may be terms and conditions limiting your home loan from falling below a certain interest rate percentage, like 1 per cent. You may need to speak to your lender or look through your own home loan’s terms and conditions to see if this is the case.

If we look globally, Denmark actually had a bank offer negative interest rates of -0.5 per cent last year. But this doesn’t mean borrowers are being paid to take out a mortgage. When you factor in fees borrowers are still owing money on the loan.

However, Danish lender Nordea Bank Abp announced that as of Tuesday, customers can now apply for 20-year home loans with an interest rate of zero per cent.

In Australia, home loan rates hitting 1 per cent or lower would mean mortgages have historically never been more affordable, making it a great time to try and get on top of your debt. If your home loan interest rate drops, consider making the same repayments as if you were still on a higher interest rate (if this feature is allowed in your home loan). This may help you to chip away at your balance faster.

Low rate fixed home loans

What happens to your savings?

Currently, some of the biggest banks in Australia are paying ongoing savings rates under 1 per cent. But could savings rates ever fall into negatives, meaning you’d pay interest to your bank to securely store your money for you?

Unfortunately, there is no clear answer at this point. But it may be something that savers experience in the form of an ongoing fee, instead of an ongoing interest rate. This is similar to many home loan or personal loan providers who charge customers annual fees and other ongoing costs.

If this were to happen, we may see savers seriously hurting in a negative rate environment. Worse, we may see an increase in Aussies withdrawing their cash and securely storing it at home to avoid these potential ongoing costs.

High interest rate savings accounts

What happens to your credit card?

When it comes to negative interest rates, credit cards are an entirely different story. Historically, the cash rate does not impact the interest rates of credit cards. In fact, credit cards are still charging interest rates as high as the cash rate once was in the ‘90s – with the average card rate sitting around 16 per cent.

If you, like much the rest of the world, are looking for a way to get paid to spend money, it’s unlikely you’ll see negative credit card rates making this happen.

In fact, if you want an alternative to costly interest rate charges but with the benefit of part-paying purchases, you may be better off considering if a buy-now-pay-later service, like Afterpay or ZipPay, is right for you.

If you enjoy the flexibility and freedom of a credit card but want to see your interest rate drop, you may need to take action into your own hands, as waiting for negative credit card interest rates is a fool’s errand.

There are currently 16 credit cards offering interest rates under 10 per cent. Switching to a low rate, low fee credit card option may be worth considering if you’re fed up with your current card’s costs.

Low rate credit cards

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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 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 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 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 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.

Remaining loan term

The length of time it will take to pay off your current home loan, based on the currently-entered mortgage balance, monthly repayment and interest rate.

Can I get a NAB home loan on casual employment?

While many lenders consider casual employees as high-risk borrowers because of their fluctuating incomes, there are a few specialist lenders, such as NAB, which may provide home loans to individuals employed on a casual basis. A NAB home loan for casual employment is essentially a low doc home loan specifically designed to help casually employed individuals who may be unable to provide standard financial documents. However, since such loans are deemed high risk compared to regular home loans, you could be charged higher rates and receive lower maximum LVRs (Loan to Value Ratio, which is the loan amount you can borrow against the value of the property).

While applying for a home loan as a casual employee, you will likely be asked to demonstrate that you've been working steadily and might need to provide group certificates for the last two years. It is at the lender’s discretion to pick either of the two group certificates and consider that to be your income. If you’ve not had the same job for several years, providing proof of income could be a bit of a challenge for you. In this scenario, some lenders may rely on your year to date (YTD) income, and instead calculate your yearly income from that.

How can I get ANZ home loan pre-approval?

Shopping for a new home is an exciting experience and getting a pre-approval on the loan may give you the peace of mind that you are looking at properties within your budget. 

At the time of applying for the ANZ Bank home loan pre-approval, you will be required to provide proof of employment and income, along with records of your savings and debts.

An ANZ home loan pre-approval time frame is usually up to three months. However, being pre-approved doesn’t necessarily mean you will get your home loan. Other factors could lead to your home loan application being rejected, even with a prior pre-approval. Some factors include the property evaluation not meeting the bank’s criteria or a change in your financial circumstances.

You can make an application for ANZ home loan pre-approval online or call on 1800100641 Mon-Fri 8.00 am to 8.00 pm (AEST).

Why should I get an ING home loan pre-approval?

When you apply for an ING home loan pre-approval, you might be required to provide proof of employment and income, savings, as well as details on any on-going debts. The lender could also make a credit enquiry against your name. If you’re pre-approved, you will know how much money ING is willing to lend you. 

Please note, however, that a pre-approval is nothing more than an idea of your ability to borrow funds and is not the final approval. You should receive the home loan approval  only after finalising the property and submitting a formal loan application to the lender, ING. Additionally, a pre-approval does not stay valid indefinitely, since your financial circumstances and the home loan market could change overnight.

 

 

Can I apply for an ANZ non-resident home loan? 

You may be eligible to apply for an ANZ non-resident home loan only if you meet the following two conditions:

  1. You hold a Temporary Skill Shortage (TSS) visa or its predecessor, the Temporary Skilled Work (subclass 457) visa.
  2. Your job is included in the Australian government’s Medium and Long Term Strategic Skills List. 

However, non-resident home loan applications may need Foreign Investment Review Board (FIRB) approval in addition to meeting ANZ’s Mortgage Credit Requirements. Also, they may not be eligible for loans that require paying for Lender’s Mortgage Insurance (LMI). As a result, you may not be able to borrow more than 80 per cent of your home’s value. However, you can apply as a co-borrower with your spouse if they are a citizen of either Australia or New Zealand, or are a permanent resident.

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.

How long does Bankwest take to approve home loans?

Full approval for a home loan usually involves a property valuation, which, Bankwest suggests, can take “a week or two”. As a result, getting your home loan approved may take longer. However, you may get full approval within this time if you applied for and received conditional approval, sometimes called a pre-approval, from Bankwest before finalising the home you want to buy.  

Another way of speeding up approvals can be by completing, signing, and submitting your home loan application digitally. Essentially, you give the bank or your mortgage broker a copy of your home’s sale contract and then complete the rest of the steps online. Bankwest has claimed this cuts the approval time to less than four days, although this may only happen if your income and credit history can be verified easily, or if your home’s valuation doesn’t take time.

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.