RBA to hold: have home loan rates hit the bottom?

RBA to hold: have home loan rates hit the bottom?

The Reserve Bank is expected to keep the cash rate on hold at 0.25 per cent when it meets today, but the rate cuts keep coming from the banks for new home loan customers.

RateCity's database shows that 507 new customer rates changed in the month of May – the vast majority of which were cuts (75%).

This includes international bank, HSBC which yesterday cut its 2-year fixed rate to 2.09 per cent – the lowest fixed rate on the market, equal with ING.

Although the cash rate is at a record low, these recent cuts indicate home loan rates might not have bottomed out just yet.

Variable rate changes in May on the RateCity database:

  • 115 variable rates were cut (95% of all variable changes).
  • 6 variable rates increased (5% of all variable changes).
  • The lowest variable rate of 2.29% is now being offered by 2 lenders; Reduce and Homestar.
Variable rates Number of home loan rate changes % of variable rate changes
Rate cuts 115 95%
Rate hikes 6 5%

See notes below.

Fixed rate changes in May on the RateCity.com.au database:

  • 265 fixed home loan rates were cut (69% of all fixed rate changes).
  • The lowest fixed rate of 2.09% is now being offered by 2 lenders: ING, HSBC.
  • 121 fixed home loan rates increased (31% of all fixed rate changes), the majority of which were for 2- and 3-year loans.
Fixed rates 1-yr 2-yr 3-yr 4-yr 5-yr Total no. of fixed rate cuts % share of fixed rate changes
Rate cuts 72 70

77

9

37

265

69%

Rate hikes 15 37

61

1

7

121

31%

See notes below.

RateCity research director Sally Tindall said while the cash rate was unlikely to move in the foreseeable future, some home loan rates could drop further as the banks battle it out for new business.

“The big four banks have probably exhausted their capacity to cut fixed rates. Now what we’re seeing is challenger banks trying to outbid them to attract new customers,” she said.

“As a result, rates could fall a fraction further, but they’re unlikely to fall far.

“While the majority of new customer rate changes over the past month were cuts, three-year fixed rates have been the exception, with almost the same number of hikes as cuts.

“In March and April, we saw a handful of non-bank lenders put record low three-year fixed rates on the table but it was clearly unsustainable. Since then, they’ve had to hike rates, which could be a sign we’ve hit the bottom in this category,” she said.

Customer interest in fixed rates has increased significantly over the last couple of months with CBA reporting fixing has more than doubled for new and existing customers since the beginning of March.

“The big four banks are offering fixed rates that are, in some cases, over half a percent lower than their lowest variable rates, so it’s no surprise people are gravitate towards fixing,” she said.

“But fixing isn’t for everyone. People need think carefully before they fix because it does come with its own unique set of rules.

“Fixed rate loans typically have caps on extra repayments, limited or no access to an offset account and break fees if they want to get out early,” she said.

Lowest variable rates on RateCity.com.au

Lender Advertised rate
Reduce Home Loans

2.29%

Homestar Finance

2.29%

Tic Toc

2.39%

See notes below.

Lowest 2-year fixed on RateCity.com.au

Lender Advertised rate
ING

2.09%

HSBC

2.09%

Newcastle Permanent

2.18%

See notes below.

Lowest 3-year fixed on RateCity.com.au

Lender Advertised rate
ING

2.14%

Macquarie Bank

2.19%

St George/Westpac

2.19%

See notes below.

Lowest 5-year fixed rates on RateCity.com.au

Lender Advertised rate
RACQ Bank

2.49%

ING

2.54%

UBank

2.59%

See notes below.

Big four bank lowest rates

Lender Advertised variable Advertised

2-yr fixed

Advertised

3-yr fixed

CBA

2.79%

2.29%

2.29%

Westpac

2.93%

2.19%

2.19%

NAB

2.84%

2.29%

2.29%

ANZ

2.72%

2.29%

2.29%

See notes below.

  • Notes: the first two tables show the number of home loans that have had a rate change since 1 May 2020. The data is based on new customer rates for owner occupier and investor home loans in the RateCity.com.au database. The data includes variations in relation to principal and interest, interest-only, fixed rate terms, loan to value ratios (LVR) and loan size.

    The rates listed above are for owner occupiers paying principal and interest. Homestar finance loan requires an LVR of 60% or less in metro areas only. Reduce Home Loans and Westpac’s lowest rates are for borrowers with a LVR of 70% or less.

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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 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 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 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 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.

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 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.

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.