The Commonwealth Bank has today joined Australia’s other three big banks in raising rates on interest-only loans, while simultaneously cutting rates for borrowers making principal and interest repayments.
From 7 July, variable rates on CBA interest-only loans will go up by 0.30%, bringing the standard variable rate to 5.77% for owner occupiers and 6.24% for investors.
According to Mozo’s home loan repayment calculator, on an owner-occupier home loan of $500,000 over 25 years, this rate hike means an extra $37,500 in interest over the life of the loan.
The big bank said the change was made in order to meet regulatory requirements, and “not in response to the bank levy that was announced as part of the Federal Budget in May.”
Lenders have frequently adjusted interest rates in 2017 to remain under the APRA enforced regulation that limits interest-only lending to 30% of a bank’s new lending portfolio. The most recent round of changes has now seen all four big banks increase interest-only loans by up to 0.35%.
CBA encouraged customers with an interest-only home loan to switch to principal and interest repayments if possible. There is no fee to switch, and by doing so, borrowers can take advantage of a 0.03% rate reduction on principal and interest loans for owner-occupiers.
Principal and interest rate cuts from the big banks
*Based on a $500,000 loan over 25 years, using the standard variable interest rate from each lender.
Although the rate reduction is small - the smallest cut out of all four big banks - those who make the switch from interest-only repayments to principal and interest could see serious savings.
Borrowers could save a massive $325,031 over the life of a 25 year, $500,000 loan by switching from an interest-only option with the new rate of 5.77%, to principal and interest repayments at the new rate of 5.22%. The trade-off, of course, is that the monthly repayments would increase by $583.
And switching to a lender from outside the big banks, such as one of the winners of the Mozo Experts Choice Award for Low Cost Home Loans, could save borrowers even more. If you’re paying off a mortgage, make sure you check out our refinancing home loan comparison table, to find offers with rates as low as 3.64%.