Mozo’s Mortgage Market Report: Cutting Through Chaos

Mozo has found in the wake of the Royal Commission, tighter lending standards, four cuts to the official cash rate in under a year and the emerging threat of the coronavirus, the big banks are still locking up the residential mortgage market. Although they are a long way from offering the best rates around, the domestic major banks are benefiting from blind loyalty that is costing their customers up to $99,945 on an average home loan. 

“Although online lenders are slowly driving change across the sector, uncertainty appears to be holding people back from banking the benefits increased competition brings,” says Mozo Director Kirsty Lamont. 

“It’s important to remember that as the coronavirus takes its toll on global markets and widespread fear sets in, it pays to keep a cool head and compare home loan products and bank the savings on offer.” 

Read on for the full report findings.

Key findings: Cutting through Chaos

Mozo found a quarter of people surveyed said official interest rate cuts have affected their confidence in the economy.^

Mozo also found although 75%^ of Australians now do the majority of their banking on a smartphone or computer, almost 60% of mortgage customers surveyed have stayed loyal to their current lender even though savings of up to $99,945 are available on an average mortgage over 30 years by switching.^     

It also found only 25%^ of people have refinanced their home loan at any point even though interest rates are at historic lows and online lenders are competing hard to move consumers away from the big banks.

When it comes to our willingness to adapt to get into the mortgage market, Mozo found almost 60%^ of people changed their spending habits before applying for a loan.

With the World Health Organisation declaring a coronavirus pandemic, Mozo’s research found 80%^ of people are worried about what the coronavirus will do to the economy. 

Section 1. Rates, Rorts and Worries  

It has almost been 12 months since the Reserve Bank of Australia (RBA) made the first of four 25 basis point cuts to the official cash rate, a move that continues to stimulate the property market as some borrowers rushed to capitalise on record low home loan rates. 

The official cuts came in the wake of the final report by the Banking Royal Commission delivered in February 2019, which created uncertainty across the mortgage broker industry after recommending an end to trailing commissions. It also found that the Australian Prudential and Regulatory Authority’s (APRA) move to tighten lending standards in late 2017 was sufficient. In practice, APRA’s crackdown left many potential borrowers, who would once have been able to secure a loan, out in the cold pondering their Afterpay statements and appetite for Uber Eats.

In the wake of the coronavirus pandemic, most recently the RBA cut another 25 basis points off the cash rate, which is wallowing at an all time low of 50 basis points. Notwithstanding the potential impact of the coronavirus, today, the mortgage market is going through a mini-boom as consumers and smaller lenders make the most of record low interest rates. For consumers, the low rate environment allows them to pay down debt, refinance and reduce monthly mortgage repayments. For smaller lenders, the potential for them to gain market share and increase the gap to the Big 4 banks has never been greater. But will consumers take advantage of the RBA cutting through the chaos and bank a better deal?     

Section 2 - Confidence and the “Corona Cut” 

At its June meeting last year the RBA made its first 25 basis point cut to the official cash rate, citing the need to support employment, reach its target band for inflation and address the soft conditions in the housing market. Effectively, the banking sector’s tighter credit controls that had been introduced in response to APRA, had dampened the investor demand and made it more challenging for some residential borrowers. It was also clear there was competition for borrowers with good credit ratings and for them mortgage rates were heading south.

The RBA made its second cut to the cash rate in July (25 basis points) again citing “soft” housing market conditions and then made a third cut in October (25 basis points). Official interest rates have stayed at this record low level of 0.75% since. Although wage growth is sluggish, the RBA appears to be fostering structurally high house prices and household debt levels. This has been born out by recent Australian Bureau of Statistics figures which show average mortgages in NSW and Victoria are at record high levels. 

In March, the RBA took the knife to the cash rate again. Dubbed by some market watchers as the “corona cut”, the central bank is clearly worried about the emerging threat the coronavirus poses to the economy and how people will respond as the fear spreads faster than the virus across the country. And RBA’s concerns are well founded with Mozo research revealing approximately 80%^ of people are worried about what the coronavirus will do to the economy. 

Although the RBA’s cuts are designed to encourage people to spend and help restore confidence in the economy, Mozo found a quarter of those surveyed said the rate cuts made them feel worried about the economy. 

With the full impact of the coronavirus on the economy still uncertain, all indications point to another official rate cut this year and this low rate, high debt environment could be here for some time. This could be seen as good news for some borrowers with lenders competing hard for their business. 

Section 3 - Banking the Chaos 

With 100 basis points being shaved off the official cash rate in the past 10 months, the Banking Royal Commission fallout washing through the market and lending standards starting to be relaxed, many lenders are in the market with incredibly low rates. 

This is particularly good news for those who have heeded the warnings around tighter lending standards and have been controlling their expenditure before applying for a loan. Indeed, Mozo research found almost 60%^ of people changed their spending habits before applying for a loan. The better shape your finances are in, the more lenders you’ll be able to consider when applying for a loan.  

Assuming you meet the lender’s criteria, Mozo analysis has found the best rates are being offered by online lenders but most people are remaining blindly loyal to the Big 4 banks. 

Section 4 - Banking on Loyalty 

With Mozo’s research finding 67%^ of people finance their property through a bricks and mortar bank, the Big 4 banks still effectively lock up the residential mortgage. This is not great news for their customers, as they usually charge significantly higher interest rates than their competitors leaving the majority of Australian mortgage holders paying too much interest each month.

Mozo found on average the Big 4 banks interest rates are 1.28% higher than the best rate in the market. At the time of publication NAB has the best variable rate among the Big 4 (2.84%, comparison rate 2.84%*), followed by ANZ (2.87%,comparison rate 2.87%*), Westpac (3.03%, comparison rate 3.04%*) and CommBank (3.32%, comparison rate 3.34%*) for a Owner Occupier 80% LVR loan.   

To make matters worse, when the RBA cuts official interest rates the Big 4 banks are often the slowest in the market to pass in relief to their customers and frequently hold back some of the cut. Mozo’s research has found by failing to pass on the rate cuts in full and delaying  the effective dates of their interest rate relief, the big banks have pocketed $24 billion payday since 2011.^

Even though interest rates have tumbled to historic lows, Mozo’s research found only 25%^ of people have refinanced their home loan. 

With 75% of mortgage customers surveyed staying not refinancing, it seems the scandal plagued big banks have managed to weather the storm and continue to bank on the ‘lazy tax’ served up by loyal customers. Interestingly though approximately 90% those surveyed believed banks should give better interest rates to customers who remain loyal to them.     

With additional cuts to the official cash rate likely, another challenge faced by the Big 4 banks is their capacity to pass on any cuts in full as they head towards a floor price. This is not great news for their loyal customers or first home buyers seeking to break into the market. Thankfully for first home buyers there are a range of options beyond the Big 4. 

Section 5 - Save with Online Only 

With Mozo research revealing approximately 75%^ of Australians are doing the majority of their banking in a smartphone or computer, the digital banking age has well and truly arrived. 

When it comes to mortgages, some of the best rates in the market are being offered by digital lenders, these companies are online only and their lower cost structures are passed on to customers in the form of lower interest rates and fewer fees.

Mozo’s research shows the top online rates are being offered by Reduce Home Loans (2.44%, comparison rate 2.47%*), Well Home Loans (2.47%, comparison rate 2.50%*) and Homestar (2.49%, comparison rate 2.52%*). Compared to the average of the Big 4 banks, switching to the best rate in the market on an owner occupied home loan at 80% LVR could save you $99,945 over 30 years.7     

Notwithstanding the fact that online lenders are offering some of the best rates in the market, Mozo found around 44%^ of people would consider getting a home loan with an online lender instead of a traditional bank. 

The survey also found people have an appetite to compare loans and switch to the best deal (49%) and get their lender on the phone and push for a better deal (48%). 

So, if you are one among the almost 50% who would consider comparing loans and switching, where are you likely to find some of the best rates in a banking sector that’s being rapidly disrupted by technology? In short - online lenders. 

Section 6 - First Home Help 

In January this year the Federal Government introduced the First Home Home Loan Deposit Scheme, which allows 10,000 first home buyers the opportunity purchase a property with only a 5% deposit. 

The scheme has purchase price restrictions in each city and income caps, $125,000 for singles and $200,000 for couples. But for those who qualify it’s a great opportunity to get on the property ladder without having to save the usual 20% deposit to avoid lenders mortgage insurance (LMI). But why does this matter? 

Industry analysis shows lending to first home buyers is up a staggering 38% and when you crunch the numbers you can see why. Mozo found someone purchasing a $700,000 property in greater Sydney who put down a 20% deposit of $140,000 to avoid a one off fee LMI fee of $6,505^, would be $6,505 better off under the first home buyer scheme which only requires a 5% deposit of $35,000 for the same purchase and no LMI fee. 

Mozo’s analysis on the best first home buyers loans has found loans.com.au (2.79%, comparison rate 2.81%*) offers one of the best rates followed by Newcastle Permanent 3.19% (3.23% comparison rate*) and BOQ 3.19% (3.80% comparison rate*).   

Section 7 - Time to Fix it? 

Mozo has found someone who fixed their interest rate 5 years ago on an average Big 4 banks rate at the time would have locked in an interest rate of 4.66%. That’s 1.17% above the current average variable rate and 2.22% above the best rate in the market. By not being able to switch to the best rate, without incurring break fees, they are paying hundreds more a year in interest that they need to. 

Although all indications are official interest rates will remain low for some time, if you are someone who likes the security and predictability of locking in a rate, Mozo’s analysis has found the best fixed rates in the market are offered by ING (2.49% for 3 years, 3.71% comparison rates*) offering one of the lowest rate, followed by BankVic (2.50% for 3 years, 3.65% comparison rate*) and Well Home Loans (2.63% for 3 years, 2.54% comparison rate*).   

When it comes to the Big 4, their fixed rates are more competitive than their variable rates, coming in 0.54% higher on average than the best rate in the market on a 3 year term. ANZ is currently offering 2.88% (4.15% comparison rate*) for if you fix for 3 years, 3.08% for 4 and 5 years (4.13% and 4.06% comparison rates*).

It’s worth remembering that fixed rates can hit hard when the fixed period ends. Mozo’s research found reversion rates up to 5.60%, 3.16% above the best variable rate in the market. 

CBA's Fixed Home Loan (OO, P&I) has a 1-year fixed rate of 3.14% while its revert rate is 4.80% (comparison rate 4.51%*). For a home loan of $400,000 (OO, P&L, LVR 80%) over 25 years, you could end up paying $510 extra a month if you failed to compare and switch to a more competitive interest rate at the end of the fixed period.

Conclusion

If you are looking to save money on your mortgage, there has never been a better time to compare rates, switch and save. Interest rates are continuing to tumble and agile digital lenders in the market with incredibly low rates the big banks are struggling to match. For eligible first home buyers the Government's first home buyer scheme is proving an effective intervention, with thousands already benefiting from the need for a smaller deposit and not being slugged with lender’s mortgage insurance. The Royal Commission is now a distant memory, lending standards appear to have eased and the RBA is posed to once again cut the official cash rate again. So if consumers can stay employed, free themselves from the fear around the coronavirus and shake off their blind big bank loyalty, significant savings are on offer. 

Tips and traps 

If you are seeking to break in the housing market, here are some tips to get you started:

• - Set up a savings account and deposit a percentage of your pay each month

• - Aim for a 20% deposit to avoid lenders mortgage insurance (LMI)

• - Control your discretionary spending

• - Pay any credit card balance off in full each month and reduce your credit limit

• - Shut down your buy now pay later account 

If you have an existing loan: 

• - Set up an offset account and have you salary paid into it each month

• - Check your current interest rate, compare and switch if you’re paying too much

• - If you’ve been with the same lender for some time and don’t want to switch, call them and push for a better rate 

Notes on research: Mozo conducted nationally representative research n=1251 through Researchify in March 2020. 

Survey findings related to Australian perceptions of Coronavirus and the economy as well as their current financial situation conducted through a nationally representative survey of 1251 Australians from March 9- 15, 2020 by research company Researchify.

Note: This comparison rate applies only to the example or examples given. Different amounts and terms will result in different comparison rates. Costs such as redraw fees or early repayment fees, and cost savings such as fee waivers, are not included in the comparison rate but may influence the cost of the loan. The comparison rate displayed is for a secured loan with monthly principal and interest repayments for $150,000 over 25 years.

Footnotes (in order of mention) 

^Mozo Nationally Representative Survey conducted by Researchify in March 2020. 

^Mozo.com.au 17 March 2020 

^Op. Cit. Researchify, March 2020

^Mozo Nationally Representative Survey October 2019

^Op. Cit. Researchify, March 2020

^Op. Cit. Researchify, October 2019

^Mozo found a $99,945 saving when switching from the average advertised Big 4 variable rate (3.72%) to the lowest rate available in our database (2.44%) for a $400,000 80% LVR Owner Occupier home loan over 30 years full term, excluding fees and charges 

^Op. Cit. Researchify, March 2020

^Ibid.

^Ibid. 

^Ibid. 

^Ibid.

^Ibid. 

^Using loan book values from APRA Monthly Banking Statistics at the time of the last RBA rate cut in May 2016, additional revenue derived by calculating interest earned to date for each major bank by not passing on the rate cut in full. 

^Ibid

^Mozo Nationally Representative Survey October 2019. 

^Nationally representative research 

^https://:www.genworth.com.au/l...