Making sure you have a competitive home loan is more essential now than ever.
Just because Australian interest rates are at record lows does not mean you can relax with an attitude that they are all the same.
In fact, with rates so low there is a lot of scope to carve a lot of years off the mortgage by getting a truly competitive interest rate and also the prospect of keeping higher repayments in place to shorten the home loan term even further.
Lots of variation between home loan rates
Surprisingly, there is quite a lot of variation between home loan rates at the moment with 42 basis points separating the best and worst for owner occupied principal and interest loans, according to comparison website Mozo.
There are even some variable deals around with a two in front of them with the average owner occupier rate now sitting at 3.99%.
That means that anyone who is paying off an owner-occupied principal and interest loan with a four in front of it is definitely paying too much and should be on the phone to their lender for a better deal.
Even those paying 3.5% and above are paying too much and should be looking for a better deal – either through switching or negotiating with their existing lender.
Fixed loans being slashed to attract new customers
Interestingly, the fixed home loan space has become a lot more competitive recently with rates falling sharply due to intense competition.
That may also be a sign that the banks believe that official interest rates are set to decline again, meaning that the banks could still make money over the term of the loans even if they seem keenly priced at the moment.
In many cases the fixed home loans are cheaper than the bank’s variable rates but many of the best fixed rates come packaged in a bundle which includes a transaction account and a credit card, as well as a mortgage.
CBA and ANZ both cutting
Commonwealth Bank (ASX: CBA) last week cut two, three and five-year fixed rates by between 0.2% and 0.8%, with the cuts applying to both owner-occupiers and property investors.
That move by Australia’s biggest bank followed a raft of other fixed rate loan cuts by a range of lenders, including Westpac (ASX: WBC), ANZ Bank (ASX: ANZ), National Australia Bank (ASX: NAB) and many smaller rivals.
Commonwealth’s biggest cut was a 0.8% reduction in its five-year fixed rate for property investors taking out interest-only loans, which will fall to 4.19%.
The bank also cut two-year fixed rates for owner-occupiers paying principal and interest by 0.61% to 3.18%, with three-year rates for these customers falling to 3.28%.
ANZ has also cut a range of its fixed rates, by 0.25% to 0.96%.
ANZ cut its one-year fixed rate for owner-occupiers paying principal and interest by 0.81% to 3.28%, with the four-year rate for these customers falling by 0.96% to 3.53%.
Markets are predicting that the Reserve Bank will lower the cash rate to 0.75% by November, with some forecasting the rate will fall to 0.5% next year as the central bank tries to push inflation higher to its target range of between 2% to 3%.
Signs of greater competition between the banks comes on top of greater stability in the property market as prices start to stabilise and rise slightly in the major Melbourne and Sydney markets.
Cutting fixed rates is a great way for banks to lure customers without undercutting profits from the rest of their large loan books, which is why those customers on existing deals that are no longer competitive need to get on the phone to ask for a lower rate or go through a broker and prepare to switch.