Home loan time warp as mortgages fall below 3%

Market enters unchartered territory with mixed messages on what borrowers can expect

Home loan time warp as mortgages fall below 3%


By Melanie Mingas

With Australia’s cash rate now at the record low of .75% following yesterday’s RBA meeting, the stage is set for mortgages to reach rates unheard of in decades. However, opinion is divided on whether or not borrowers will receive the full 25bps reduction.

The RBA cut the official cash rate for the third time this year at its October meeting. Since the first reduction in June, Canstar calculates there have been 593 cuts to variable interest rates and 1,175 cuts to fixed interest rates.

In the hours following the RBA’s announcement, two lenders announced new, sub-3% rates: Athena was first of the starting blocks offering 2.84%, followed by Homestar Finance at 2.74%.

But the majors weren't so generous.

Overnight, NAB announced a 15bps reduction across its owner-oc P&I and interest only loans, as well as its investor P&I, while its interest only loan for investors will be reduced by 30bps, effective 11 October. CBA knocked 13bps off its rates, rising to 25bps for its investor interest only standard variable rate loan.

Both product suites remain in the 4-5% rate range, meaning a difference in repayments of up to $3,000 a year when compared to Athena and Homestar.

The reductions are in line with predictions made by Canstar group executive of financial services, Steve Mickenbecker.

“It’s good news for home borrowers, but with their profit margins under pressure from low rates the cut is likely to be between .15% and .20%. Most borrowers will still be on rates around 4% compared to lows around 2.74%. The difference in repayments is over $3,000 a year – too much to ignore,” he said.

In response, FBAA managing director Peter White had a strong message for the banks.

"Banks should not be using this decrease as a mechanism to ‘buy new business’. In the past existing borrowers have waited weeks and months for any benefits whereas new borrowers are offered the new rate immediately. This should be passed to existing mortgage holders now," he said.

However, Finsure MD John Kolenda maintained that the cuts marked the start of a new trend.

“We are definitely coming into an era where many home loan rates will fall into the 2% range and possibly go even lower,” he said.

“Borrowers should be reviewing their home loan every time the RBA makes an adjustment to the cash rate. There’s no prospect of rates going up any time soon so this should be a shot in the arm for consumer confidence. With Christmas approaching, the domestic economy will lift if consumers have a change of heart and start spending again,” Kolenda added.

Yet Mickenbecker disagreed.

“It’s hard to see this [cut] energising the economy, but it does dampen down the Australian dollar in the face of rate cuts overseas. Expect another cut in the next few months,” Mickenbecker said.

The RBA is in good company with its latest decision – globally, five central banks are already in negative rates then in September, the US Federal Reserve lowered its federal funds rate and the European Central Bank lowered its deposit rate.

CEO of Mortgage Choice, Susan Mitchell said, “We will have to wait and see to what extent lenders pass the cut on to borrowers but the reality is, home loan interest rates have not been this low since the 1950s. And, with dwelling values in the major capitals starting to turnaround, now could be a great time for hopeful buyers to put their plans in action.”

Predicting another cut in November, she added, "The latest data from the labour force supports the case for another reduction to the cash rate."

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