Why now might be the best time to refinance your home loan
Just because the Reserve Bank didn’t move yesterday is no guarantee lenders won’t.
The RBA yesterday left the official cash rate on hold for the 11th meeting in a row. With a stable cash rate for the last year, one could be forgiven for thinking the home loan market is pretty static.
Nothing could be further from the truth.
Last month, 17 lenders in the finder.com.au database moved on rates. There were rate hikes as high as 0.45% and rate cuts as big as 0.40%. For context, a 40 basis point cut on a $500,000 home loan that was previously at 5.00% would mean more than a $120 reduction in your monthly repayments. Likewise, a 45 basis point hike on the same loan would increase your monthly repayments by nearly $140. Clearly, some of the rate moves happening in the market could make a big difference to your budget.
Why all the movement?
So, why are lenders moving so drastically outside of the RBA, and what can you do to take advantage of it?
Much of the motivation behind lenders’ rate moves in recent months has been the actions of regulators. The Australian Prudential Regulation Authority (APRA), the body that regulates banks in Australia, has been trying to slow down lending to investors. In March, APRA announced it would cap banks’ new interest-only lending at 30%. Interest-only loans have typically been most popular with investors.
For many banks, including some of the big four, interest-only borrowers accounted for up to 40% of their new lending. The moves by APRA have meant that banks need to slow down interest-only lending, and they’ve done that by moving on rates.
How can I benefit?
The good news is that there are upsides to all these rate movements. While lenders are trying to deter interest-only borrowers, they’re also trying to incentivise principal and interest repayments. They’ve done this both by cutting rates and by cutting the fees that would usually be charged to move to a principal and interest loan.
Moreover, because banks know they won’t be able to source as much business from the investor market due to regulatory restrictions, they now have to make their deals for owner-occupiers even more enticing to make up for the loss of investor business.
That means if you’re an owner-occupier, there could be great deals waiting for you in the home loan market. It’s still not uncommon to find rates below 4%, and if you’re paying more than 5% you’re almost certainly paying too much.
What if I’m an investor?
While it’s true that banks are largely deterring investors through rate hikes, there’s still good news: As many banks become less competitive on investor rates, other lenders become more competitive.
This is because of the existence of non-bank lenders. Non-bank lenders are lenders that raise their own funding, rather than relying on deposits. Because they don’t take deposits, they’re not regulated by APRA. And while they are regulated and bound to responsible lending obligations (in this case by the Australian Securities and Investment Commission, or ASIC), they’re not currently bound by the same concrete speed limit for investment lending.
Non-banks have historically responded to competitive gaps in the marketplace by filling those gaps with sharp deals. This time should be no different, and investors may find some great rates with non-bank lenders.
Likewise, even some institutions regulated by APRA could offer you a better deal than you’re currently getting. This is because some smaller lenders don’t have the huge overheads that come along with the massive infrastructure of larger banks, and can pass those savings along. Moreover, lenders like credit unions, mutual banks and building societies are owned by their members, and aren’t driven to maximise profits for shareholders. This means they’re often able to offer much better rates.
Whether you’re an owner-occupier or an investor, there are huge upsides to the current trends in the home loan market. Even in a market where the RBA has stayed firmly on the sidelines, now might still be the best time to refinance for a better deal.
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