Turning tides: banks start cutting interest-only mortgage rates

The recent flood of interest-only rate hikes may be ebbing, as big bank CBA joins a number of lenders reversing current trends to cut fixed rates on interest-only loans.

This week, CommBank introduced an $1,250 incentive to refinancers through its broker channel, and at the same time, announced rate cuts to fixed rate interest-only loan rates.

The rate reductions apply to the Fixed Rate Wealth Package and Fixed Rate Home Loan for both owner-occupiers and investors.

Though interest-only rates have been on the rise lately as lenders work to stay under the 30% new lending limit set by APRA, it seems the tides may be beginning to turn, with ANZ, MyState and Suncorp also announcing rate reductions on interest-only loans this week.

ANZ cut its two-year fixed, interest-only investor loan by 10 basis points to 4.64% (6.10% comparison rate*), while simultaneously hiking the rate for principal and interest loans. MyState cut it’s two-year fixed rate interest-only loan from 4.19% down to 3.89% (5.21% comparison rate*), while Suncorp reduced interest-only fixed rates on its two and three-year investment home package plus to 4.29% (5.42% and 5.34% comparison rate respectively*).

According to Mozo home loan expert Steve Jovcevski, the backslide on fixed interest-only rates could be a sign that the banks are on their way to being comfortably under APRA’s lending limits, and can now begin to think about increasing their lending again.

“Initially when they cut back on interest-only lending, some banks might get down to something like 20% of new lending, which is well below the cap set by APRA. That means they can then ease off a bit and start bumping their loan numbers back up to the 30% mark,” he said.

But Jovcevski cautioned that the changes to fixed rates shouldn’t be taken as the beginning of a market-wide trend yet.

“Fixed rates have different funding considerations than variable rates, so while this could signal the beginning of decreases in variable rates and across the market, it isn’t a sure sign of a trend emerging just yet.”

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Jovcevski said that when it comes to fixed rates being lowered, this generally indicates that the RBA may not raise the official cash rate in the next couple of years.

“When banks set fixed rates, they always try to price in future rate rises to some extent. So if you have a two-year fixed term, the rate you secure will reflect how likely the bank thinks it is that market rates will rise in that time and by how much,” he said.

“Fixed rate cuts usually mean the lender is banking on rates staying steady or dipping in the future.”

Want to lock in a low fixed rate for your home loan? Head over to our fixed rate home loan comparison table to check out your options.

*WARNING: 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.