Three trends that could impact your home loan in 2020

As we move closer to Christmas and the New Year break, we can begin to look back on the financial news that really mattered in 2019 and start to predict what we could see in the year ahead

#1 FHBs may surge as the First Home Loan Deposit Scheme launches

First Home Buyer (FHB) demand could increase in the first half of 2020 as the First Home Loan Deposit Scheme (FHLDS) rolls out.

The government scheme gives Australians the opportunity to have the government act as “guarantor” on their loan with a deposit as little as 5 per cent. This allows FHBs to avoid the costly Lenders Mortgage Insurance (LMI) fee that typically comes with deposits under 20 per cent.

The two approved non-major lenders, Commonwealth Bank of Australia and National Australia Bank, will start offering guaranteed loans from 1 January 2020, whilst the 25 non-major lenders will start on 1 February 2020.

The FHLDS will offer 10,000 FHBs the chance to secure their dream home and avoid LMI which can be thousands of dollars. This opportunity could see FHB numbers for owner occupier home loans surge, as Australians previously unable to afford a home, get a foot on the property ladder.

How will this impact you?

If you’re an FHB, this could be music to your ears if you are able to get your application approved by one of the 27 lenders and enter the FHLDS early next year.

If you’re an investor, you may see that house prices rise due to the influx of FHB demand, which could see you increase equity in your existing properties.

If you’re a homeowner waiting to sell, you may see an opportunity to capitalise on the demand that the FHLDS may bring, which could see you making a higher profit on your sale.

#2 RBA cuts could push home loan interest rates even lower

Story rba

In 2019, rates starting with 2 became common in the non-major lending space. The three RBA cash rate cuts, although not passed on in full by all lenders, saw home loan lending lift.

Sally Tindall, RateCity Research Director, sees the rate cuts as having a positive impact on both new buyers and homeowners looking to reduce their mortgage repayments.

“Our research shows that the average Australian mortgage holder is now saving an estimated $127 a month thanks to the three RBA cuts this year,” she said.

Tindall also believes that refinancers could see the benefit of lower rates if they are willing to shop around.

“Our research also shows that while the average owner-occupier rate has dropped 0.57 per cent in the last year, the lowest rate has dropped by 0.75 per cent.”

However, the rate cuts and savings may not stop there. Governor Philip Lowe of the RBA, in his November statement, suggested that there could be more cash rate cuts on the cards in the future, which could see home loan rates drop even lower.

“Due to both global and domestic factors, it [is] reasonable to expect that an extended period of low interest rates will be required in Australia to reach full employment and achieve the inflation target,” Lowe said.

How will this impact you?

If you’re looking to refinance, 2020 could be the year to save thousands on your mortgage. Consider shopping around with smaller lenders to capitalise on lower interest rates that could result from more RBA rate cuts.

If you’re in the market for your first home, lower interest rates could see you able to borrow thousands more than you previously could.

If you’re an investor, you could either refinance your home to decrease your mortgage repayments. Or, potentially you could secure a new investment to take advantage of historically low interest rates, just ensure you compare any fees and refinancing costs before switching.

#3 Housing prices could continue to increase in early 2020

The latter half of 2019 saw housing prices skyrocket across the country, with Corelogic’s National Index entering positive growth territory for the first time since April 2018.

According to Tim Lawless, Research Director at Corelogic, five months of consistent growth was paired with the largest monthly gain in the national index since 2003.

“Sydney and Melbourne continued to drive the rapid recovery, with values up by 2.7% and 2.2% respectively over the month,” he said.

“The synergy of a 75 basis points rate cut from the Reserve Bank, a loosening in loan serviceability policy from APRA, and the removal of uncertainty around taxation reform following the federal election outcome, are central to this recovery.”

This focus on Sydney and Melbourne and their growth, however, is something that Propertyology Head of Research, Simon Pressley, believes is a short-sighted approach. Instead, Pressley predicts a wider trend that will see housing prices increase across the nation.

“Propertyology forecasts growth in median dwelling prices over the next five years to be superior to the last five years and more widespread, as opposed to being concentrated on a select few locations,” said Pressley.

How will this impact you?

For homeowners who have been waiting for the market to recover before they sell, 2020 could see you getting a higher return on your sale, or see you increase your equity in the property you already own. This increase in equity could provide the funds for retirement you have been looking for, or potentially enable you to purchase an investment property.

For first home buyers, this could mean that better access to the property market due to the fact that lower interest rates could be counteracted by higher house prices.

For investors, rising house prices may see you increase the equity in your property and could encourage you to refinance to lenders with lower rates. Switching to lenders with lower rates could also improve your overall cash flow from your investment, as younger buyers could struggle to afford to buy and may instead choose to rent.

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Learn more about home loans

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 do I refinance my home loan?

Refinancing your home loan can involve a bit of paperwork but if you are moving on to a lower rate, it can save you thousands of dollars in the long-run. The first step is finding another loan on the market that you think will save you money over time or offer features that your current loan does not have. Once you have selected a couple of loans you are interested in, compare them with your current loan to see if you will save money in the long term on interest rates and fees. Remember to factor in any break fees and set up fees when assessing the cost of switching.

Once you have decided on a new loan it is simply a matter of contacting your existing and future lender to get the new loan set up. Beware that some lenders will revert your loan back to a 25 or 30 year term when you refinance which may mean initial lower repayments but may cost you more in the long run.

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.

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.

When should I switch home loans?

The answer to this question is dependent on your personal circumstances – there is no best time for refinancing that will apply to everyone.

If you want a lower interest rate but are happy with the other aspects of your loan it may be worth calling your lender to see if you can negotiate a better deal. If you have some equity up your sleeve – at least 20 per cent – and have done your homework to see what other lenders are offering new customers, pick up the phone to your bank and negotiate. If they aren’t prepared to offer you lower rate or fees, then you’ve already done the research, so consider switching.

Interest Rate

Your current home loan interest rate. To accurately calculate how much you could save, an accurate interest figure is required. If you are not certain, check your bank statement or log into your mortgage account.

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.

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.

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. 

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.

Who offers 40 year mortgages?

Home loans spanning 40 years are offered by select lenders, though the loan period is much longer than a standard 30-year home loan. You're more likely to find a maximum of 35 years, such as is the case with Teacher’s Mutual Bank

Currently, 40 year home loan lenders in Australia include AlphaBeta Money, BCU, G&C Mutual Bank, Pepper, and Sydney Mutual Bank.

Even though these lengthier loans 35 to 40 year loans do exist on the market, they are not overwhelmingly popular, as the extra interest you pay compared to a 30-year loan can be over $100,000 or more.

How do I know if I have to pay LMI?

Each lender has its own policies, but as a general rule you will have to pay lender’s mortgage insurance (LMI) if your loan-to-value ratio (LVR) exceeds 80 per cent. This applies whether you’re taking out a new home loan or you’re refinancing.

If you’re looking to buy a property, you can use this LMI calculator to work out how much you’re likely to be charged in LMI.

What happens when you default on your mortgage?

A mortgage default occurs when you are 90 days or more behind on your mortgage repayments. Late repayments will often incur a late fee on top of the amount owed which will continue to gather interest along with the remaining principal amount.

If you do default on a mortgage repayment you should try and catch up in next month’s payment. If this isn’t possible, and missing payments is going to become a regular issue, you need to contact your lender as soon as possible to organise an alternative payment schedule and discuss further options.

You may also want to talk to a financial counsellor. 

How personalised is my rating?

Real Time Ratings produces instant scores for loan products and updates them based what you tell us about what you’re looking for in a loan. In that sense, we believe the ratings are as close as you get to personalised; the more you tell us, the more we customise to ratings to your needs. Some borrowers value flexibility, while others want the lowest cost loan. Your preferences will be reflected in the rating. 

We also take a shorter term, more realistic view of how long borrowers hold onto their loan, which gives you a better idea about the true borrowing costs. We take your loan details and calculate how much each of the relevent loans would cost you on average each month over the next five years. We assess the overall flexibility of each loan and give you an easy indication of which ones are likely to adjust to your needs over time.