“But this time they didn’t match the standard 2.01% variable rate from Loans.com.au, an online lender,” he says. Since renegotiating, the rate has fallen to 1.99% and he is considering asking for another cut.
Bonelli says the lower loan also allows for larger repayments so he can pay off the principal sooner.
Mortgage brokers and buyers’ agents say they are ‘inundated’ with borrowers considering switching loans or lenders as the average three-year fixed rate falls nearly 90% below the average variable rate , according to an analysis by Canstar, which monitors fees and rates.
“Lenders don’t always pass on rate cuts to existing customers because the reduction in interest rates has a significant impact on lenders’ profits,” says Phoebe Blamey, director of Clover Financial Solutions, explaining why borrowers should shop.
Graham Cooke of Finder, an online comparison site, says, “If you’ve been with the same provider for a few years, chances are you’re paying too much. Right now, your home loan rate should have one or two ahead of it – even loans less than 12 months old need to be assessed.
According to another comparison site, RateCity, most lenders have cut fixed rates over one to five years since the RBA’s last cash rate cut.
“It’s not just online lenders with low rates anymore,” says research director Sally Tindall. “The biggest banks are starting to steal the show.”
Canstar explains how a homeowner with a $1 million loan (and a 20% deposit) could save by going from an average variable rate of 3.34% to a fixed rate of 1.99% over three years. Monthly repayments would increase from $4,402 to $3,691, or more than $8,500 per year.
The same borrower with a 40% deposit on the lowest variable rate of 3.30% could save nearly $800 per month by switching to the lowest variable rate of 1.77% offered by Reduce Home Loans.
Monthly repayments would drop from $4,380 to $3,582, a reduction of about $798 – over $9,500 per year, or about $290,000 over the 30-year term.
The discount loan is only available to a borrower with a 40% deposit.
Other lenders, such as St George’s and Macquarie’s Banks, also give higher discounts to lenders with lower loan-to-value ratios, usually around 60%.
Blamey, a financial adviser and mortgage broker, says the big four banks are “unusually generous” to existing customers to ensure they are not poached by cheaper rivals.
“If you’re borrowing from a big lender, get a quote from another big lender for comparison,” she says. “The lender will take this much more seriously than comparing with a small lender using cheap rates as a business acquisition strategy.”
Canstar Group leader Steve Mickenbecker said “the big banks are getting in on the act” with CBA and Westpac cutting four-year fixed rates to 1.99% and NAB cutting the same rate to 1.98%.
Borrowers should also compare the advertised or “all-in” interest rate with the comparison rate, which is often referred to as the “true” rate because it includes various fees and charges such as set-up fees.
For example, the general rates for variable mortgages in the table vary from 1.99% to 2.19% (a difference of 20 basis points) compared to comparison rates between 2.05% and 2.93 % (a difference of 88 basis points). This will make the loan more expensive in the long run.
Blamey points out that in many cases, borrowers can best negotiate a discount with their existing lender.
Borrowers considering switching must balance the possible loss of amenity with lower repayments, especially for long-term fixed rates of four and five years. For example, loan repayments will not decrease if market rates fall during the fixed rate period.
The cash rate is at an all-time high, but lenders are aggressively competing for business, which means there are likely to be even bigger cuts.
“We can expect more widespread discounts for lower LVR loans as lenders seek risk-free growth in response to continued uncertainty in the environment,” Mickenbecker adds.
Set-up fees can range from around $300 to $500 to switch loans within the same bank and up to $1,500 to switch to a new borrower. Check the comparison rates as they will reflect this.
There may be additional setup fees and ongoing charges if tied to a home package, which usually includes a credit card, savings account, or checking bank account.
There may also be limits on additional payments, with withdrawal facilities on any unauthorized additional payments.
Many lenders allow an offset account to be tied to a fixed rate loan account, but no offset benefit is allowed during the fixed term.
Also, withdrawal is not available on the accounts during the fixed term, but any additional payment made to the account is accessible at the end of the fixed term.
Breakage fees for getting out of a mid-term fixed rate can cost several thousand dollars. Indeed, a lender offering a fixed rate term assumes the risks of any rate movement by tapping into the wholesale money markets.