As the Reserve Bank raises interest rates for the fourth time in four months, home loan borrowers are bracing for more repayment pain.
Key points:
- Banks are offering big discounts to new home loan customers
- The number of borrowers refinancing their home loans is at a record high
- Borrowers are shying away from more expensive fixed-term mortgages
The official interest rate is now at its highest level in six years, at 1.85 per cent, up from a record low of 0.1 per cent at the start of May.
Some economists say the RBA is only halfway through its rate-hiking cycle, with the goal of reaching, or even exceeding, 3 per cent by the end of the year.
As the cost of money goes up, the big four banks have dramatically raised interest rates for existing customers with variable-rate loans, and more rate rises are expected.
RateCity said bank customers could expect to see an average variable rate of 4.61 per cent if today’s RBA rate rise was passed on in full.
It said the accumulated 1.75 per cent rise in borrowing costs that had occurred since early May would add an extra $472 a month to mortgage repayments for the typical borrower with a 25-year, $500,000 loan.
Borrowers with a $1 million mortgage would have to pay an extra $944 a month.
Fixed rates are rising
The rates offered for new fixed-rate loans are rising noticeably.
It comes as new Australian Bureau of Statistics (ABS) data show the proportion of new home loans being written with fixed rates has plunged to 9 per cent, down from the July 2021 peak of 46 per cent.
Sally Tindall, the research director at RateCity.com.au, said 90 lenders raised rates on fixed-term home loans last month before this latest increase.
“Fixed-rate hikes are coming thick and fast as the cost of funding continues to put pressure on the banks’ bottom line,” she said.
The financial comparison service Mozo said the fixed rates offered by some online lenders had already emerged to as high as 8 per cent.
As of Tuesday evening, no major bank had announced an interest rate increase in response to RBA’s latest rate hike.
But Macquarie Bank announced a range of different price responses.
It said it would increase its variable home loan reference rates by 0.5 per cent from 12 August.
It will decrease its fixed-home-loan interest rates by up to 0.75 per cent for new customers and existing variable-rate customers who want to fix their interest rate, from 5 August.
And it will increase the ongoing interest rate on its savings and everyday transaction accounts by 0.5 per cent, to 2.25 per cent, on balances up to $250,000.
Refinancing arises, demand for new loans weakens
As the higher cost of borrowing sees demand weakening for new home loans, more existing borrowers are refinancing to try to eke out lower interest rates from their banks’ competitors.
Mortgage broker Mortgage Choice said 42 per cent of borrowers who took out home loans in June were refinancing existing debt.
Discounts offered by banks for new borrowers saw refinancing jump 9.7 per cent in June to a record $12.7 billion.
Meanwhile, the value of new loan commitments being written each month remains near historically high levels, but it is clearly on the decline.
The ABS said the value of mortgage approvals fell by 4.4 per cent in June, on a seasonally adjusted basis, as the RBA’s rate hikes dampened appetite for borrowing.
“The value of new owner-occupier loan commitments fell 3.3 per cent in June 2022, while new investor loan commitments fell 6.3 per cent,” Katherine Keenan, ABS head of finance and wealth, said.
“These falls followed rises in May, attributed to a clearing of application processing backlogs by lenders.”
Discounts offered for lower-risk borrowers
Research from financial comparison website Canstar shows almost one in two lenders are offering loans with slightly lower rates to borrowers with large deposits.
It says for borrowers with a 40 per cent deposit or the equivalent equity in their property, 49 per cent of lenders on its comparison site are offering interest rates that are on average 0.21 per cent below the rate being paid by borrowers with a half deposit that size.
Canstar financial analyst Steve Mickenbecker said as the economic outlook became more uncertain, lenders were competing harder for lower-risk borrowers.
“Property prices are widely expected to fall by 10 per cent to 20 per cent,” he said.
“Lenders are looking for loans where there is a greater buffer for falls in property prices and almost half of them are rewarding these borrowers with lower interest rate offers,” he said.
“Having enjoyed strong house price increases over the last couple of years, borrowers who have been in their houses for several years now own a healthy share.
“There may be a strong case for borrowers in this position to open up a negotiation with their lenders for a rate reduction,” he said.
Late last month, ANZ reduced rates on new standard variable mortgages by up to 0.5 percentage points for borrowers with bigger deposits.
Ms Tindall told RN Breakfast that it paid for people to shop around, with 10 lenders cutting rates for new customers over the past three months.
“What we do know from all the data that comes through is that new customers, customers willing to switch to a different bank, often get the best deals,” she said.
“Why? Because banks discount rates for new customers, not loyal existing ones.”
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