Do home loan rate drops only benefit new customers?

Whether you’re considering your first home loan or well into paying off a current mortgage, recent interest rate reductions could impact you. But it does depend on the type of home loan you’ve taken out and with which lender.

Before we get into it, the first thing you’ll need to understand is why the Reserve Bank of Australia (RBA) cash rate – which fell to yet another historic low last week – is important. 

A low cash rate means banks benefit from cheaper lending, and they can choose to pass on those savings to their own borrowers. This, in theory, should encourage spending elsewhere and help stimulate a sluggish economy.

However, this is merely a benchmark for banks to consider when setting their own rates and they’re in no way required to follow the RBA’s lead. Banks can pick and choose where they make cuts across lending and deposit rates to attract or retain the kind of banking customers they’re after.

So, when it comes to home loans, let’s take a look at who might benefit from the flow-on effects of the November RBA rate cut. 

As a new customer, how can I benefit from interest rate drops? 

If you’re about to jump on the homeownership bandwagon, a low interest rate market is a great place to start. Lenders are keen to nab attractive new customers who will have a big chunk of mortgage to pay off (thus offering lenders higher potential earnings via interest payments).

To entice these home loan customers, many banks and non-bank lenders have been offering increasingly low rates, some of which have been cut again by the full RBA reduction. This is predominantly across fixed home loan rates, but some variable rates have also seen cuts. 

As a new customer you’ll have the pick of the reduced rate litter. Your home loan deposit size and other lending criteria may impact what rate you can access, but you’ll be in a great position to negotiate a better deal with multiple competitive offers out there.

The next choice is whether you go with a fixed or variable rate. While there have been more cuts to fixed rates recently you shouldn’t necessarily sideline variable options. 

Since the RBA is anticipating rates will remain low for some time as the economy recovers from COVID-19, we may see sustained low rates or further cuts to variable rates. While they’re still changeable, this could mean more savings while retaining flexibility.

What if I already have a home loan?

This is where things get a little more complicated. The effect of rate cuts on existing home loan customers will depend on the type of loan they have or are looking to switch to.

For variable home loans: This is where current home loan holders could be saving. If you have a variable home loan and your lender makes a cut, it can be for new and existing customers. Check with your provider to make sure you’re getting the cut if you’re eligible.

For fixed home loans: You probably won’t notice any changes to your rate. Even if your lender drops its fixed rates across various terms, that won’t necessarily impact your rate since you locked it in when you originally took out the loan.

However, if you’re coming to the end of your fixed timeline, keep the lower advertised rate in your back pocket for negotiating your next fixed or variable rate.

For refinance home loans: If you’re in a position to refinance your home loan (say, you’ve paid a substantial portion of the loan and have a steady income), you might be able to nab a bargain as rates drop.

Lenders want to attract borrowers who are low-risk and likely to pay back the loan. This is often someone with more equity in their home – it’s referred to as having a low loan-to-value-ratio (LVR). So, if you fit in this category and are considering refinancing, you may be able to score the most recently reduced headline rates.

What home loan reductions have we seen after the November RBA cut?

Rate reductions have been top of mind since the cash rate was cut by 15 basis points down to 0.10% on 3 November.

We’ve seen the big four cut fixed rates (no movement in the variable department) alongside a host of smaller institutions and online lenders making changes to fixed loans as well as a few variable shifts.

If you take a look at Mozo’s home loan statistics page you’ll see this trend rolling on from when COVID-19 first hit in March, with fixed rates being cut more dramatically than variable home loans.

The average variable rates Mozo tracks for owner occupiers paying back principal and interest on a loan have dropped from 3.68% in March to 3.34% at the start of November.

Meanwhile, the one-year fixed option for this kind of loan has dropped by almost double the basis points in that time, from an average of 3.27% to 2.51%. Longer term fixed rates haven’t plunged quite as quickly but are still out-pacing variable reductions on average. 

So, if you’re considering taking out a home loan or negotiating with your lender, keep these kinds of emerging trends in mind. Then, compare the deal you’re getting with some of the options below.