The state of play post-RBA

The state of play post-RBA

None of the big four banks have committed to passing on Tuesday’s RBA rate cut to their variable customers, leaving millions of mortgage holders out in the cold.

CBA, Westpac, NAB and ANZ instead played a game of cat and mouse with their announcements, hurdling each other at the finish line to offer the new lowest fixed rates. 

As a result Westpac, and its subsidiaries St George and Bank of Melbourne, now have the lowest fixed home loan rate in the country at 1.89 per cent for four years. (Note: These rates are for people with larger deposits which attract a discount of up to 0.10 per cent. The rates announced by Westpac yesterday were based on an 80 per cent LVR). 

Big four banks – lowest owner-occupier fixed rates 

  CBA Westpac NAB  ANZ
1 year fixed

2.19%

1.99%

2.19% 

2.09%

2 year fixed

2.14%

1.99%

2.09%

2.09%

3 year fixed

2.14%

1.99%

2.09%

2.09%

4 year fixed

1.99%

1.89%

1.98%

2.29%

5 year fixed

2.99%

2.69%

2.79%

2.29%

Source: RateCity.com.au. Note: Westpac's rates are for a LVR of 70%. St George and Bank of Melbourne rates are for an LVR of 60%.

RateCity.com.au research director, Sally Tindall, said the majority of banks have now failed to pass on the last two RBA rate cuts. 

“Most existing variable rate customers have missed out on a total rate cut of half a per cent this year,” she said.

“Governor Lowe had said a rate reduction would help address problem loans, but the banks’ refusal to pass on these cuts means people in financial strife aren’t likely to be getting any rate relief.

“Instead they’re stuck in mortgage prison clocking up an almighty interest bill. 

“Anyone lucky enough to be in a position to refinance who missed out on a rate cut should snub their bank back by taking their mortgage walking.

“This latest round of so called ‘cuts’ from the banks confirms loyalty is dead and buried.

“If the average owner occupier switched to one of the lowest rates on the market they could potentially save over $20,000 in the first five years of refinancing. 

“What we know now is that variable rates aren’t going to drop by themselves. If you want rate relief, you have to take action yourself,” she said.

 

How much homeowners could save by refinancing

  Savings after 1 year Savings after 5 years
Refinancing to the lowest variable rate (1.77%)

$4,140

$24,977

Refinancing to the lowest fixed rate (1.89% for 4 yrs)

$7,290

$20,303

Notes: Based on an owner occupier paying principal and interest with a $400K loan balance refinancing 5 years into a 30 year loan. The existing customer rate is 3.16%. Assumes the fixed rate reverts to the discounted variable rate after the 4th yr. LVR requirements apply. Cost is based on interest paid, fees and sign up bonus offered.

 

Lowest ongoing variable rates on RateCity.com.au

Lender Rate
Reduce Home Loans 1.77%
Homestar Finance 1.79%
Pacific Mortgage Group 1.89%

Note: the above loans all require a loan-to-value ratio of under 60%.

 

Lowest 1 year fixed rates on RateCity.com.au

Lender Rate
Homestar Finance 1.98%
Westpac/ St George/ Bank of Melbourne* 1.99%
Greater Bank 1.99%

 

Lowest 2 year fixed rates on RateCity.com.au

Lender Rate
Westpac/ St George/ Bank of Melbourne* 1.99%
Illawarra Credit Union 1.99%
Hume Bank 2.04%

 

Lowest 3 year fixed rates on RateCity.com.au

Lender Rate
Bank First 1.99%
Westpac/ St George/ Bank of Melbourne* 1.99%
Homestar Finance 2.06%

 

Lowest 4 year fixed rates on RateCity.com.au

Lender Rate
Westpac/ St George/ Bank of Melbourne* 1.89%
NAB 1.98%
CBA 1.99%

 

Lowest 5 year fixed rates on RateCity.com.au

Lender Rate
ANZ 2.29%
Citi 2.39%
BankVic / Virgin Money 2.49%

Source: RateCity.com.au. *Westpac Group rates are for loans with a loan-to-value ratio of under 70%.

 

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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 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 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.

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.

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. 

Why does Westpac charge an early termination fee for home loans?

The Westpac home loan early termination fee or break cost is applicable if you have a fixed rate home loan and repay part of or the whole outstanding amount before the fixed period ends. If you’re switching between products before the fixed period ends, you’ll pay a switching break cost and an administrative fee. 

The Westpac home loan early termination fee may not apply if you repay an amount below the prepayment threshold. The prepayment threshold is the amount Westpac allows you to repay during the fixed period outside your regular repayments.

Westpac charges this fee because when you take out a home loan, the bank borrows the funds with wholesale rates available to banks and lenders. Westpac will then work out your interest rate based on you making regular repayments for a fixed period. If you repay before this period ends, the lender may incur a loss if there is any change in the wholesale rate of interest.

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.

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 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 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 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.