Reduce Home Loans pulls down lowest variable mortgage rate to 1.89%

Reduce Home Loans pulls down lowest variable mortgage rate to 1.89%

A non-bank lender is beating the lowest variable rate record with a 1.89 per cent rate, an indicator that the race between mortgage lenders is far from over. 

Reduce Home Loans is offering an interest rate below 2 per cent for the second time, after launching the country’s lowest fixed rate of 1.90 per cent only two weeks ago. 

The 1.89 per cent variable rate is:

  • 0.80 per cent lower than the lowest variable rate offered by a big four bank, 
  • 1.33 per cent lower than the Reserve Bank of Australia’s (RBA) average existing customer rate of 3.22 per cent, and
  • 0.06 per cent lower than the next lowest variable home loan rate.

Reduce’s variable rate loan has a comparison rate of 1.92 per cent, and is available to those with a loan-to-value ratio (LVR) of up to 60 per cent. The maximum loan amount is $850,000.

Borrowers may be eligible for a loyalty discount of 0.10 per cent after staying with the lender for five years.

How much you could save by refinancing

Home owners may save thousands in the first year alone by refinancing to the lowest variable rate, a RateCity analysis found.

By switching to Reduce’s 1.89 per cent home loan, an average mortgage holder could potentially avoid stumping up an extra:

  • $3,754 in the first year,
  • $8,922 in the first two years,
  • $23,728 in the first five years, and
  • $82,901 over the life of the loan.

The calculations, which account for switching fees, assume a borrower is:

  • on the RBA’s average existing customer rate of 3.22 per cent,
  • five years into a 30-year term, and
  • paying principal and interest on a $400,000 balance.

How much the average home owner could potentially save by refinancing to this rate (including switching costs and fees)

  New lowest rate Existing Customer rate Difference
1 year

$8,971

$12,725

$3,754

5 years

$36,319

$60,047

$23,728

Source: RateCity. Notes: based on an owner occupier paying P&I with a $400K balance outstanding 5 years into a 30 year loan. Existing customer rate is from the RBA. Based on interest paid and fees. Fees include discharge fee from old lender and upfront fees from new lender but not government switching fees.

Home loan rates keep tumbling

The first time a lender dropped its home loan rate to below 2 per cent was in late June, but currently 10 lenders are offering rates starting with a 1, an indicator of the speed at which mortgage rates are falling. 

Fixed interest rates are seeing bigger drops than variable rates on average, which is generally pushing up demand for fixed rates

But that doesn’t mean lenders are forgetting about variable rates.

Variable rates plummeted by 58 basis points to 3.23 per cent and 2.92 per cent for existing mortgage holders and new borrowers respectively in the 12 months to July 2020, the latest RBA figures on housing lending rates showed. 

And more than 40 lenders slashed their variable rates for owner-occupiers in the two months to September, according to RateCity records.

Before today, another non-bank lender Easy Street Financial Services had the lowest variable rate on offer at 1.95 per cent, though that only applied to home loans of more than $750,000.

The great Australian refinancing rush

COVID-19 has seen a significant rise in refinancing, worth tens of billions of dollars. 

More than 113,000 Australians have switched mortgage lenders in the four months to July, reshuffling the providers of a staggering $53.7 billion of home loans, the latest figures from Australian Bureau of Statistics showed.

Low interest rates across the board and ongoing competition between lenders means it may be a good time to look at refinancing. RBA governor Philip Lowe urged mortgage holders in July to shop around and ask for a discount on their interest rate. 

But some of the best mortgage rate deals on the market are being targeted squarely at mortgage holders who have a sizeable level of equity banked up.

Home owners who have held their property for six years or more could be in a better position to reap the benefits of switching to their lender’s competitor, RateCity analysis found. 

Banks, including Westpac, Macquarie Bank and St George, are offering lower interest rates to people with an LVR of 70 per cent, in a bid to add reliable borrowers on to their home loan books.

How does this new 1.89% variable rate compare?

Lowest ongoing variable rates on RateCity.com.au

Lender

Rate

Reduce Home Loans

1.89%

Easy Street Financial Services ($750K+)

1.95%

Freedom Lend

2.17%

Well Home Loans

2.17%

The 10 lenders offering rates under 2%

Lender Loan product Advertised Rate
Reduce Home Loans Variable 1.89%
  Fixed (intro rate 1 year) 1.90%
Easy Street Financial Services Variable (loans over $750K) 1.95%
Homestar Finance 1-year fixed 1.98%
Greater Bank 1-year fixed 1.99%
Bank First 3-year fixed 1.99%
Community First Credit Union 2-year fixed 1.99%
Loans.com.au Variable (intro rate 1 year) 1.99%
People’s Choice Credit Union 1-year fixed 1.99%
Bank of Us 1-year fixed (Tasmania only) 1.99%
Hume Bank 3-year fixed (Local postcodes only) 1.99%

Source: RateCity.com.au.

Note: Hume Bank rate is only available to new loans for renovation or construction of new properties within 150 km of Albury Post Office. Loans.com.au product is an introductory variable rate – 1.99% for one year after which it reverts to 2.57%. Data accurate at time of publishing.

Big four banks – lowest rates

Lender Advertised variable Advertised

2-yr fixed

Advertised

3-yr fixed

CBA 2.79% 2.29% 2.29%
Westpac* 2.69% 2.19% 2.19%
NAB 2.69% 2.19% 2.29%
ANZ 2.72% 2.29% 2.29%

Source: RateCity.com.au.

Note: Rates are for owner occupiers paying principal and interest. *Westpac’s rates are for customers with a loan-to-value ratio of less than 70 per cent. Data accurate at time of publishing.

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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 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.

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).

Monthly Repayment

Your current monthly home loan repayment. To accurately calculate how much you could save, an accurate payment figure is required. If you are not certain, check your bank statement.

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 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 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 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.

Savings over

Select a number of years to see how much money you can save with different home loans over time.

e.g. To see how much you could save in two years by switching mortgages,  set the slider to 2.