Report: Banking on rate relief? You might be paying too much for your home loan

Quick facts: 

• Some home loan lenders including the big banks are known to lag behind when passing on Reserve Bank rate cuts, costing mortgage holders $1.2 billion since 2011. 
• They also made $4,308,577 in extra interest a day by not cutting variable rates after the November 2020 RBA cut. 
• 12 banks delayed the effective date of their cuts following official rate cut in November by more than 2 weeks from the day of the first RBA announcement.
• Only 33 lenders passed on some of the official rate cut last November but the average variable rate has dropped a further 5 basis points. 
• The mortgage repayment holidays of these banks during COVID-19 were essential to limiting the number of defaults - but there’s a catch to these support measures.
• Aussies could save hundreds on their monthly repayments by switching from a big bank to a more competitive small lender. 
• The best variable rate in the Mozo database starts with ‘1’, and is offered by Reduce Home Loans.

Introduction: Rates not as low as they should be

Banks can profit off home loan customers by postponing how quickly they pass on a Reserve Bank cash rate cut. Typically these are larger and more established banks, including the big four, and the latest Mozo research shows that delays by these lenders has seen them pocket $1.2 billion in additional home loan interest since 2011. From time to time, they’ve also responded with partial rate cuts or withheld rate relief from variable customers - if we add those instances into our calculations too, then their extra interest earnings since 2011 soar to $29.9 billion.

In fact, our research found that following the official rate cut in November 2020, only 18 out of 95 lenders passed on the rate relief in full, while 15 passed on part of the cut. It’s worth crunching some quick numbers on this: at the current average variable home loan rate of 3.29%, the monthly repayment for owner occupiers paying principal and interest is $1,750. If all 95 lenders had passed on the 15 basis point cut in November in full, the new average variable rate would have been 3.19%.

Let’s also note that many of the much smaller lenders make their cuts sooner to actually deliver customers greater savings. The glaring differences in rate cut effective dates should at least provide some pause for borrowers as to whether they’re getting the best deal possible from their home loan provider.

Why you need to look for the best rate

The big four banks were surprisingly quick to announce they would slash the full 25 basis points off their variable home loans back in March of 2020. But despite being early to the chopping block after that RBA cut, these lenders didn’t take the axe to their home loan rates until over a week later (in mid to late March).

Meanwhile, rate cuts from smaller lenders like Athena Home Loans, Homestar, Freedomlend and Reduce Home Loans came into effect immediately after they were announced. Athena was a standout player - being one of the first lenders to pass on the full March RBA cut and give both its new and existing customers instant access to those rate benefits.

There is a difference between fixed and variable cuts however. For example, many lenders responded with cuts to fixed rates rather than variable rates, following the second and third RBA cash rate reductions in 2020. 

That’s because unlike variable rates, fixed rates apply only for a short period of time of say, one to three years, before they usually revert to a higher rate.

Also consider that fixed rate loans have become less costly for the banks to finance, thanks to access to cheaper funding through the RBA’s Term Funding Facility (TFF) - a facility designed to support and encourage lending by offering banks a very low wholesale rate of 0.10% (previously 0.25%) for three years. 

This shift has mostly been bad news for borrowers. Mozo found that by not passing on rate relief to variable home loan customers following the November RBA cut, the big banks are earning a total $4.3 million in extra interest per day. 

“The decision by the nation’s biggest lenders to solely slash fixed home loan rates indicates they are keen to boost their loan books and lock in new business without having to commit to offering a competitive variable rate for many years to come,” Mozo Director, Kirsty Lamont says.

Mortgage repayment holidays: The ups and downs 

To be fair, the big banks have also been stung by the fallout from COVID-19, as half a million mortgage holders paused their repayments due to financial hardship, according to the Australian Banking Association. 

ANZ for instance reported a 40% decline in cash profits to $3.76 billion in the 2020 financial year, while Westpac saw an even larger 62% fall in cash earnings to about $2.61 billion. 

It’s encouraging to see the big banks support mortgage customers during COVID-19. Though measures like home loan repayment holidays also have a downside known as ‘interest capitalisation’. This is where interest continues to accrue over the paused period, which means mortgage holders wind up with a larger outstanding loan balance once their holiday ends.

Now with these repayment holidays rolling to an end and JobKeeper set to expire soon in March, Lamont urges the big banks to do more to help home loan customers. 

“If the big banks had passed on the full RBA cut in November and without any delay, the average owner occupier on a variable home loan rate could have been $33 a month better off,” she said.

Where to find the best variable rate home loans

Shopping around and refinancing to a lower rate (given that you’re in a good financial position to do so) could reduce your monthly repayments by potentially hundreds of dollars.

The big four banks now have better variable rates than the average of 3.29%, which is great. But they are still not as competitive as some of the smaller non-bank lenders. Let’s compare their offers to the three best variable rates in the Mozo database, all of which belong to online lenders:

Big bank home loans

Best variable home loans in the Mozo database

If you made the switch, say, from the average big four bank variable rate of 3.57% to the lowest variable rate in the Mozo database, here’s how much you could save:

• For a $400,000 home loan over 30 years (owner occupier, principal and interest), your monthly repayments would drop from $2,018 down to $1,476.
• That’s an extra $542 you can keep in your wallet every month, or $6,504 over one year.

No rate research? Then no saving

Despite your mortgage being possibly one of your biggest ongoing expenses, a separate Mozo report found that one in ten mortgage holders didn’t shop around for their current home loan. 

As such, they may not realise the savings they could reap just by doing the right research.

There are a number of fees and features to weigh up, so to help you find the best  home loan for you, check out these five questions to ask while shopping around.  

Then head on over to our refinance home loans hub to start comparing your options today.

This report includes contributions from JP Pelosi.