Is now the best time to refinance your home loan?

Posted on Thursday, October 5, 2017 - 10:21

This month, the Reserve Bank of Australia met to leave the official cash rate at the same level. This is the 11th consecutive time the RBA hasn’t moved the interest rate, still at a record low.

Even so, average home loan interest rates have been creeping up. The Standard Variable Rate hit an 18-month low of 4.78% - it now stands at 4.92% (all following figures are averages.) The “cheapest” of all the standardised options, the two-year fixed rate loan dipped at a 4.2% (max) in November 2016. It’s now crept back up to 4.74% (max.) All the trends are upward, not down. So what’s going on, and how does that help your decision to refinance?

Explaining the upward trend

Over the past few months, the regulator of banks, Australian Prudential Regulation Authority (APRA) have been working to restrict interest-only loans. This March, they announce they would cap all new interest-only lending at 30%. Interest-only loans may increase investor speculation in the housing market. In fact, the Singapore government banned Interest-only lending in 2009 to combat this phenomenon. Investors lose out, but this is good news for owner-occupiers looking to refinance.

Investor pain is a homeowner’s gain

Interest-only loans are quite lucrative products for a bank, attracting larger sums (think huge property developments and portfolios) compared with an individual home. Consequently, banks are reducing fees and rates on owner-occupier oriented products to make up for the restrictions on interest only lending.

The big four (ANZ, Commonwealth, NAB, Westpac) account for a whopping 40% of home lending in Australia. Such a massive percentage means lower rates to entice customers, and increased competition in the market.

Even though the average rates are trending upward, individual bank products designed for homeowners might have significant savings in store for you. It’s not uncommon to find two-year fixed loans with comparison rates a shade under 4%. If you are an owner-occupier and are on a rate above 5%, you can definitely shop around for a better refinancing deal.

What about investors?

Investors can still find good deals on interest-only loans from non-bank lenders (i.e, financial institutions that do not accept deposits.) APRA does not regulate non-bank lenders and are not subject to their rules on lending. It’s also a win for investors:

“Non-bank lenders can move much quicker than banks, and exploit gaps in the market with competitive deals for investors,” says Savvy CEO Bill Tsouvalas. “If you’re an investor looking for an interest-only loan, there are plenty of non-bank lenders out there eager to get your business. A business-oriented broker can help you find something to suit your needs.”

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Filed Under: Home Loans