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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 rateExisting Customer rateDifference
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%

LenderLoan productAdvertised Rate
Reduce Home LoansVariable1.89%
Fixed (intro rate 1 year)1.90%
Easy Street Financial ServicesVariable (loans over $750K)1.95%
Homestar Finance1-year fixed1.98%
Greater Bank1-year fixed1.99%
Bank First3-year fixed1.99%
Community First Credit Union2-year fixed1.99%
Loans.com.auVariable (intro rate 1 year)1.99%
People’s Choice Credit Union1-year fixed1.99%
Bank of Us1-year fixed (Tasmania only)1.99%
Hume Bank3-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

LenderAdvertised variableAdvertised

2-yr fixed

Advertised

3-yr fixed

CBA2.79%2.29%2.29%
Westpac*2.69%2.19%2.19%
NAB2.69%2.19%2.29%
ANZ2.72%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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This article was reviewed by Personal Finance Editor Mark Bristow before it was published as part of RateCity's Fact Check process.

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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.

How long can you fix a home loan rate for?

Most lenders should let you fix your interest rate for anywhere between one and five years. While rare, a few lenders may offer fixed rate terms for as long as 10 years.

Fixing your home loan interest rate for a longer term can keep your budgeting fairly straightforward, as you shouldn't have to factor in changes to your mortgage repayments if variable rates change, such as when the Reserve Bank of Australia (RBA) changes its rates at its monthly meeting. Additionally, if variable rates rise during your fixed rate term, you can continue to pay the lower fixed rate until the fixed term ends, potentially saving you some money.

Of course, a longer fixed term also means a longer length of time where you may have less flexibility in your home loan repayments. It’s also a longer period where you won’t be able to refinance your mortgage without paying break fees. If variable rates were to fall during this period, you may also be stuck paying a higher fixed rate for a longer period.

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 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.

Are fixed rates or variable rates cheaper?

Fixed and variable home loan interest rates are discretionary based on the lender’s decision. They will also be influenced by the Australian economy, as well as the Reserve Bank of Australia’s cash rate. The specific interest rate you may be offered will also depend on your credit history and financial situation.

Whether a fixed or variable rate home loan is the cheaper option for you will depend on all the above, and may still fluctuate over a 25-year home loan term. Therefore, it’s worth comparing your loan options with our comparison tables to see how the rates compare, based on your specific financial needs.

What are the different types of home loan interest rates?

A home loan interest rate is used to calculate how much you’ll pay the lender, usually annually, above the amount you borrow. It’s what the lenders charge you for them lending you money and will impact the total amount you’ll pay over the life of your home loan. 

Having understood what are home loan rates in general, here are the two types you usually have with a home loan:

Fixed rates

These interest rates remain constant for a specific period and are a good option if you’re a first-time buyer or if you’re looking for a fixed monthly repayment. One possible downside of a fixed rate is that it may be higher than a variable rate. Also, you don’t benefit from any lowering of interest rates in the market. On the flip side, if rates go up, your rate won’t change, possibly saving you money.

Variable rates

With variable interest rates, the lender can change them at any time. This change can be based on economic conditions or other reasons. Changes in interest rates could be beneficial if your monthly repayment decreases but can be a problem if it increases. Variable interest rates offer several other benefits often not available with fixed rate home loans like redraw and offset facilities and free extra repayments. 

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.

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. 

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 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 are the features of home loans for expats from Westpac?

If you’re an Australian citizen living and working abroad, you can borrow to buy a property in Australia. With a Westpac non-resident home loan, you can borrow up to 80 per cent of the property value to purchase a property whilst living overseas. The minimum loan amount for these loans is $25,000, with a maximum loan term of 30 years.

The interest rates and other fees for Westpac non-resident home loans are the same as regular home loans offered to borrowers living in Australia. You’ll have to submit proof of income, six-month bank statements, an employment letter, and your last two payslips. You may also be required to submit a copy of your passport and visa that shows you’re allowed to live and work abroad.