RBA governor Philip Lowe encourages mortgagors to refinance

RBA governor Philip Lowe encourages mortgagors to refinance

Reserve Bank of Australia (RBA) governor Philip Lowe has thrown his support behind the fresh rise in home loan refinancing, as mortgage interest rates fall to historical lows.

In an online speech on Tuesday, Dr Lowe said it was worth shopping around and asking for a discount on their interest rate.

“I encourage people who haven't already taken up the opportunity to do that to look at their mortgage rate and look for a better deal,” he said.

“For many years I’ve been, in lots of public forums, I've been encouraging people to look at the rate they were getting from their bank, and if they weren’t getting a very low rate, go and knock on the door and set up a Zoom conference with their banker and ask for a better deal,” he said.

“And if the bank said no, go to another bank.”

How many Australians are refinancing their mortgages?

One positive that has come out of COVID-19, Dr Lowe said, was the number of people socially distancing at home who have been using their time to hunt for a better deal on their mortgages.

With cheap money flowing through the credit market, tens of thousands of Australians have already jumped at the opportunity for a lower interest rate.

Owner-occupiers refinanced either with their existing lender or by through another lender to the tune of $15.1 billion in May, according to the Australian Bureau of Statistics (ABS), a 25 per cent surge from April.

More than 21,000 Australians living in their own home took advantage of fierce competition for lower-risk borrowers in the home loan lender market and refinanced about $10 billion worth of mortgages to an external lender in May.

Yet in the same month, the value of new owner-occupier home loan commitments fell by about 10 per cent to $12.31 billion.

Dr Lowe said it was the first time that the value of refinance loans was almost as high as the number of loans on newly purchased properties. 

“I've been very pleased to see the amount of refinancing going on,” he said.

“(Through refinancing), people get a better deal, it frees up some cash flow and it puts some extra competitor discipline to the banking system.”

Dr Lowe added that the real estate market has “held up as well as I would hope”, and the state of market would be determined largely on the jobless rate and the availability of work, particularly for younger Australians.

“If they (young people) get jobs and they get training, the housing situation will inevitably look after itself one way or another,” he said.

How many lenders have cut mortgage interest rates?

Minutes for the RBA July interest rate meeting, published on Tuesday, noted that fixed-rate mortgages were rising in popularity.

“Interest rates on new fixed-rate mortgages were noticeably lower than on new variable rate mortgages, which had led to an increasing share of new or refinanced loans on fixed rates.”

Lenders are trimming interest rates on more fixed-rate mortgages than on variable-rate ones, RateCity data found.

Forty lenders slashed interest rates across 487 fixed-rate home loans in June and July, despite no changes to the official cash rate. For variable-rate mortgages, 42 lenders reduced rates across 260 home loans.

More than 20 lenders lowered rates across their fixed and variable products.

In total, 57 lenders made an interest rate cut to at least one of their mortgages, with the rate reductions in the June and July period averaging at 24 basis points.

 

Fixed-rate mortgages

Variable-rate mortgages

Total

No. of lenders that have cut rates in June & July

40

42

57

No. of home loans with rate cut in June & July

487

260

747

Note: As of July 22, 2020. Source: RateCity.

What are the lowest home loan interest rates available?

As the home loan interest rate contest escalates, mortgage borrowers may be in a position to benefit. If you’re looking for low-interest home loans, there are several options either below 2 per cent or hovering just above that.

The lowest fixed home loan rate on the RateCity database comes from Bank of Us, which was the first lender with a mortgage rate to dip below 2 per cent. Tasmanian residents are able to access a fixed rate of 1.99 per cent (2.71 per cent comparison rate) on their home loan. 

If you live on the mainland, Homestar Finance has a fixed-rate home loan at 2.06 per cent (2.38 per cent comparison rate).

For those wanting some flexibility, the lowest variable home loan rate is Loans.com.au’s 1.99 per cent introductory rate (2.71 per cent comparison rate). Be aware that the rate is valid for 12 months, and after expiry, the rate reverts to 2.57 per cent.

If you don’t like the idea of a honeymoon rate that will expire, Freedom Lend is offering a 2.17 per cent variable-rate home loan (2.17 per cent comparison rate) for new customers with a deposit of at least 30 per cent.

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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.

Does the Home Loan Rate Promise apply to discounted interest rate offers, such as honeymoon rates?

No. Temporary discounts to home loan interest rates will expire after a limited time, so they aren’t valid for comparing home loans as part of the Home Loan Rate Promise.

However, if your home loan has been discounted from the lender’s standard rate on a permanent basis, you can check if we can find an even lower rate that could apply to you.

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 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 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 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 the Home Loan Rate Promise?

The Home Loan Rate Promise is RateCity putting its money where its mouth is. We believe that too many Australians are paying too much for their home loans. We’re so confident we can help Aussies save money, if we can’t beat your current rate, we’ll give you a $100 gift card.*

There are two reasons it pays to check your rate with the Home Loan Rate Promise:

  • You can find out how much you could save on your home loan by switching to a loan with a lower interest rate
  • If we can’t beat your current rate, you can claim a $100 gift card with our Home Loan Rate Promise*

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 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.

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.

When do mortgage payments start after settlement?

Generally speaking, your first mortgage payment falls due one month after the settlement date. However, this may vary based on your mortgage terms. You can check the exact date by contacting your lender.

Usually your settlement agent will meet the seller’s representatives to exchange documents at an agreed place and time. The balance purchase price is paid to the seller. The lender will register a mortgage against your title and give you the funds to purchase the new home.

Once the settlement process is complete, the lender allows you to draw down the loan. The loan amount is debited from your loan account. As soon as the settlement paperwork is sorted, you can collect the keys to your new home and work your way through the moving-in checklist.

What do people do with a Macquarie Bank reverse?

There are a number of ways people use a Macquarie Bank reverse mortgage. Below are some reasons borrowers tend to release their home’s equity via a reverse mortgage:

  • To top up superannuation or pension income to pay for monthly bills;
  • To consolidate and repay high-interest debt like credit cards or personal loans;
  • To fund renovations, repairs or upgrades to their home
  • To help your children or grandkids through financial difficulties. 

While there are no limitations on how you can use a Macquarie reverse mortgage loan, a reverse mortgage is not right for all borrowers. Reverse mortgages compound the interest, which means you end up paying interest on your interest. They can also affect your entitlement to things like the pension It’s important to think carefully, read up and speak with your family before you apply for a reverse mortgage.

Cash or mortgage – which is more suitable to buy an investment property?

Deciding whether to buy an investment property with cash or a mortgage is a matter or personal choice and will often depend on your financial situation. Using cash may seem logical if you have the money in reserve and it can allow you to later use the equity in your home. However, there may be other factors to think about, such as whether there are other debts to pay down and whether it will tie up all of your spare cash. Again, it’s a personal choice and may be worth seeking personal advice.

A mortgage is a popular option for people who don’t have enough cash in the bank to pay for an investment property. Sometimes when you take out a mortgage you can offset your loan interest against the rental income you may earn. The rental income can also help to pay down the loan.