Getting through the mortgage maze: Chasing the lowest rates as most lenders pass on partial cash rate cut

Getting through the mortgage maze: Chasing the lowest rates as most lenders pass on partial cash rate cut
Getting through the mortgage maze: Chasing the lowest rates as most lenders pass on partial cash rate cut

The dust is starting to settle on the Reserve Bank’s decision to cut the cash rate by 25 basis points this week to 3% – the lowest it has been since September 2009.

Most lenders have announced their decisions, with cuts ranging from 20 basis points to the full 25 and with these new rate cuts kicking in between December 10 and December 24.

Unlike previous decisions, the three major banks that still take their cue from the RBA – NAB, Commonwealth Bank and Westpac – have been relatively quick in announcing decisions to pass on 20 basis points to variable rate mortgage holders, all doing so by Wednesday afternoon.

As a result, NAB continues to offer the lowest standard variable of the big four at 6.38%, followed by Commonwealth Bank at 6.40% and Westpac at 6.51%.

 

Date new rate kicks in

Standard variable rate

Three-year fixed rate

NAB

Dec 10

6.38%

5.49%

CBA

Dec 10

6.40%

5.54%

Westpac

Dec 17

6.51%

5.59%

ANZ

??

6.60%

5.54%

Source: bank websites

The only difference is the timing of the rate cuts, with NAB and the Commonwealth bank’s new variable rates kicking in on December 10 and Westpac borrowers having to wait an extra week.

Bank-bashers will argue Westpac is cashing in at the expense of borrowers by delaying passing on the rate cuts – the big four banks earn an estimated extra $50 million collectively for every day they don't pass on a rate cut.

ANZ borrowers have a longer wait, with the bank making its independent rate review decision on Friday, December 14 – and most likely also passing on 20 basis points to borrowers, meaning a standard variable rate of 6.4%.

Rate cuts are catalysts for many borrowers to reassess their current mortgage and consider refinancing with a more suitable lender, often offering a lower interest rate – a 25-basis-point reduction on a $300,000 home loan over 25 years equals monthly repayment savings of around $50.

The federal government’s ban on exit fees also makes it cheaper to switch lenders, but borrowers should bear in mind that it only applies to variable mortgages dating from July 1, 2011 and does not apply to fixed rate home loans, which still carry hefty exit fees in most cases in the thousands of dollars.

Nevertheless, around one in five borrowers (according to Mortgage Choice figures) are still choosing to refinance into a fixed-rate loan, with one-year fixed rates currently starting from below 5% and three-year fixed rates just over 5%. There is also the option to split your loan between fixed and variable mortgages.

 


 

Borrowers should bear in mind that while a fixed rate loan can provide some peace of mind if rates start rising, they can prove a major headache if they continue fall, as happened  around September 2008, when the average three-year fixed rates was 8.75% but then followed a period of steep variable rate cuts, leaving fixed-rate borrowers paying an enormous premium, while variable borrowers enjoyed rates as low as 5.75%.

Mortgage comparison websites such as ratecity.com.au, mozo.com.au and infochoice.com.au are a good way to get a sense of the range of rates being offered in the market place by a variety of lenders, but bear in mind that they may not compare all the advertised rates available and always consider the comparison rate, which is the rate inclusive of fees and charges.

Average standard variable rate vs three-year fixed rates over 2012

 

SVR

 

3yr Fixed

1-Jan

7.30%

6.38%

1-Feb

7.30%

6.38%

1-Mar

7.39%

6.34%

1-Apr

7.39%

6.48%

1-May

7.40%

6.45%

1-Jun

7.04%

6.14%

1-Jul

6.82%

6.12%

1-Aug

6.82%

5.94%

1-Sep-

6.82%

5.92%

1-Oct

6.82%

5.73%

1-Nov

6.62%

5.54%

1-Dec

6.62%

5.54%


Source: Ratecity.com.au

Borrowers should also bear in mind that standard variable rate offerings of the major banks are only headline rates with all the banks offering rate discounts to borrowers who qualify or for their packaged home loan offerings, which can include things like a credit card, an offset account and a transaction account.

Westpac pointed out in its rates announcement that packaged home loan borrowers get a 70-basis-point discount of the standard variable rate mean – a rate of 5.81% from December 17.

Borrowers may also be able to negotiate individual discounts with their bank manager or lender, particularly if they are borrowers of good standing and can present the research showing the cheaper alternatives available in the market place.

Borrowers happy to refinance outside the major banks or their subsidiaries may qualify for variable rate as low as 5.22% offered by loans.com.au, the online offering of non-bank lender FirstMac.

Alternatively UBank, the online home loan and savings arm of NAB, is offering a refinancing variable rate of 5.47%, meaning borrowers can take comfort that they still have the backing of a major bank.

Of course a lower interest rate should not be the soul consideration when refinancing though it can be a good starting point.

Rather refinancing into a loan suited to your financial needs and goals is much more important and speaking to a reputable ASIC-licensed mortgage broker may help in wading through the various fixed and variable offerings in the market.

Credit laws require that mortgage brokers recommend loans that are “not unsuitable”, must provide explanations for their recommendations and disclose all commissions they receive.

 


The major bank subsidiary brands have also passed on 20 basis points leaving their standard variable rates as follows: BankWest (6.39% from December 18); St.George Bank (6.49% from December 17) and Bank of Melbourne (6.40% from December 17).

Bank of Melbourne is also promising to beat the variable home loan rate offerings of the big four banks – including its banking parent Westpac – in an effort to separate out the challenger bank brands from the big four in the minds of consumers.

Online bank ING Direct is the only major banking brand to pass on the full rate cut, offering an eye-catching 5.72% on its most popular Mortgage Simplifier variable rate product, but with the caveat that the new rate only kicks in on December 24 while recent APRA banking figures show the Dutch-based lender slowing down its provision of new mortgage considerably in the past year.

Other lenders to have passed on the full rate cut include Yellow Brick Road – with funding from Macquarie group – offering a rate at 5.25% per annum for the first year and as low as 5.54% over the remaining life of its Empower loan.

Credit unions and building societies also offer low rate home loans and a different customer proposition, given they are mutual lenders and are not driven by a need to maximise shareholder returns.

CUA, one of the biggest mutual lenders cut its variable rates by 20 basis points and is offering a new standard variable rate of 5.85% from December 13, which is 62 basis points lower on average than what the major banks are offering.

Another of the bigger mutual lenders, Heritage Bank (formerly Heritage Building Society) has cut variable home loan interest rates by 20 basis points to offer a standard variable interest rate of 6.14%, effective from December 14.

Property Observer readers can get great refinancing tips from two free webinars we have run this year: How smart property buyers and investors should approach refinancing in the current environment and, The Do's and Don’ts of Refinancing Your Existing Home Loan ... and How to Avoid Unnecessary Hurdles.


Larry Schlesinger

Larry Schlesinger

Larry Schlesinger was a property writer at Property Observer

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