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).

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.

How is interest charged on a reverse mortgage from IMB Bank?

An IMB Bank reverse mortgage allows you to borrow against your home equity. You can draw down the loan amount as a lump sum, regular income stream, line of credit or a combination. The interest can either be fixed or variable. To understand the current rates, you can check the lender’s website.

No repayments are required as long as you live in the home. If you sell it or move to a senior living facility, the loan must be repaid in full. In some cases, this can also happen after you have died. Generally, the interest rates for reverse mortgages are higher than regular mortgage loans.

The interest is added to the loan amount and it is compounded. It means you’ll pay interest on the interest you accrue. Therefore, the longer you have the loan, the higher is the interest and the amount you’ll have to repay.

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.

When does Commonwealth Bank charge an early exit fee?

When you take out a fixed interest home loan with the Commonwealth Bank, you’re able to lock the interest for a particular period. If the rates change during this period, your repayments remain unchanged. If you break the loan during the fixed interest period, you’ll have to pay the Commonwealth Bank home loan early exit fee and an administrative fee.

The Early Repayment Adjustment (ERA) and Administrative fees are applicable in the following instances:

  • If you switch your loan from fixed interest to variable rate
  • When you apply for a top-up home loan
  • If you repay over and above the annual threshold limit, which is $10,000 per year during the fixed interest period
  • When you prepay the entire outstanding loan balance before the end of the fixed interest duration.

The fee calculation depends on the interest rates, the amount you’ve repaid and the loan size. You can contact the lender to understand more about what you may have to pay. 

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.

How to use the ME Bank reverse mortgage calculator?

You can access the equity in your home to help you fund your needs during your senior years. A ME Bank reverse mortgage allows you to tap into the equity you’ve built up in your home while you continue living in your house. You can also use the funds to pay for your move to a retirement home and repay the loan when you sell the property.

Generally, if you’re 60 years old, you can borrow up to 15 per cent of the property value. If you are older than 75 years, the amount you can access increases to up to 30 per cent. You can use a reverse mortgage calculator to know how much you can borrow.

To take out a ME Bank reverse mortgage, you’ll need to provide information like your age, type of property – house or an apartment, postcode, and the estimated market value of the property. The loan to value ratio (LVR) is calculated based on your age and the property’s value.

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.

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.