Mozo Money Moves: Challenge to APRA Buffer as Rate Cuts Roll On—Plus, Best Super Revealed

This week’s bumper edition covers the continuation of cuts to term deposits and home loan fixed rates across the Mozo database, as lenders grow more optimistic about the future of interest rates.

We also dive into the Australian Banking Association’s latest media release that called for more flexible home lending criteria, and a rethink of the 3% serviceability buffer, as buyers face high barriers to refinancing amid an ongoing affordability crisis. 

This  issue is further complicated by the costly catch-22 of Lenders Mortgage Insurance (LMI), as Mozo’s new research shows many borrowers struggle to save a 20% home loan deposit, but those who can’t save it face tens of thousands of dollars in LMI fees. Further, as LMI costs are determined by the lender, not the borrower, buyers cannot shop around for a better rate. This lack of flexibility leaves them with little choice but to accept the high fees.

In exciting news, Mozo also launched its inaugural Superannuation Awards this week, highlighting the best performing and lowest fee super funds for Australians. This new category within the Mozo Experts Choice Awards provides valuable guidance for Aussies unsure of which super fund to choose.

Let’s get into it!

Banks position themselves for an RBA rate cut

After a remarkable 200 cuts to fixed home loan rates (when looking at owner occupier loans with LVRs of 80% or less paying principal and interest), and over 218 cuts to term deposits in September, this trend shows no signs of slowing. 

Fixed Rate Cuts

This week, lenders have cut 30 fixed home loan rates, bringing October's total to 135 fixed rate cuts for the same loan scenario.

With all the Big Four banks on board, it’s clear they’re feeling optimistic about an impending cash rate cut from the Reserve Bank of Australia (RBA). As Mozo writer Jack Dona shared, Commbank remains resolute that a rate cut will come through by the end of the year. 

Currently, the average fixed home loan rates for 1, 3 and 5 years on the Mozo database (when looking at a $400k home loan paying principal and interest with an 80%LVR) are just over 6%p.a. 

However median fixed rates for 2-year and 3-year terms have now dropped below 6% p.a.. The 2-year fixed median rate sitting at 5.99% p.a. and the 3-year at 5.97% p.a. It’s a competitive arena out there, with lenders eager to attract borrowers ahead of anticipated rate changes.

“While we can’t predict the exact timing of the RBA’s first cash rate cut, these recent reductions signal that banks are positioning themselves for one,” says Rachel Wastell, Mozo’s finance expert.

“They are aware however, that they may need to pass on any RBA cuts to variable mortgage rates if the cash rate drops during the fixed terms. So, while these rates are attractive, borrowers and refinancers should remain cautious.” 

Banks are likely betting that variable rates will be lower by the end of those terms—or at least that they can recoup any losses from the cuts, so borrowers should be taking this into account. 

Variable rates have been much quieter, with only 15 cuts recorded in October.

“Though variable rates have been relatively stable, with only 15 cuts recorded in October, don't be misled; this calm won't last forever. When the RBA finally acts, expect a surge in variable rate cuts."

“After all, lenders will be keen to avoid any backlash for not fully passing on the first rate cut, especially following 13 rate hikes that have added hundreds of dollars to monthly mortgage repayments.”

Home Loan Insights:

• Buyers unable to front-up a 20% deposit for a home loan are paying up to an estimated $33,000 extra on an insurance product designed to protect the bank’s bottom line.
• Paying off your mortgage ahead of time can feel like a daunting task, but there are ways to pay down your home loan faster – and doing so can save you thousands in repayments.
• Another additional home loan cost buyers should be aware of is the cost of conveyancing, but what is conveyancing, and what exactly does the process involve? 

Rabobank cuts high savings rate but still leads the pack

This week, Rabobank has lowered its market-leading introductory savings rate from 5.75% to 5.60% p.a., now just 10 basis points ahead of ME Bank's ongoing bonus rate of 5.55% p.a. This move comes as slightly surprising, as banks generally wait for a cash rate cut before adjusting at-call deposit rates, which can be changed quickly without commitment.

While Rabobank's adjustment is noteworthy, it pales in comparison to the recent wave of term deposit cuts. Since October began, the Mozo database has recorded 118 term deposit cuts, primarily affecting 6-, 12-, and 24-month term deposit rates. 

Earlier this year, 6-month terms peaked at 5.30% p.a., and 1-year terms reached 5.40% p.a., but now the best rates have fallen to 5.15% p.a. for 6 months and 5.00% p.a. for 1 year, both offered by Judo Bank and others.

“For savers who can lock in their funds, term deposits offer significant advantages, especially with potential RBA rate cuts on the horizon,” explains Wastell.

“Securing a good rate for 12 to 24 months could yield better returns than standard savings accounts - but remember term deposits come with heavy penalties for early withdrawal so make sure you can afford to lock your savings away before you commit.”

“Online savings accounts remain competitive, and you can still get a bonus rate around five and a half percent, but be mindful that once the RBA cuts, savings rates will start dropping in response.”

Banking Association calls for change to APRA criteria

On Thursday,  the Australian Banking Association (ABA) made headlines by urging the Senate to reassess the current home loan lending criteria, particularly the 3% serviceability buffer. The stringent buffer is added to the interest rate of a home loan to determine whether the borrower can meet repayments if interest rates increase by 3 percentage points.

Looking at the average variable rates and average fixed rates currently in the Mozo database, this suggests borrowers are needing to prove they can afford repayments on loans based on interest rates above 9% p.a.

For the average advertised rates from the Big Four banks, this jumps to above 10% p.a.

"The serviceability buffer not only restricts first-time buyers from qualifying for loans, but it also traps some mortgage holders in their current loans,” says Wastell.

Many mortgage holders may want to switch to a lower rate to reduce their repayments but find themselves unable to prove they can afford repayments based on rates of 9% or more.

The ABA also emphasised that limitations of the buffer for first-time buyers are compounded by the fact their ability to repay a 30 year loan is currently based solely on their first year income, without considering potential future income growth.

The 3% buffer, which has been under scrutiny well before ABA released their thoughts this week, was recently defended in a parliamentary submission by APRA in September. The regulator maintained that “in the context of ongoing economic uncertainty and cost of living pressures, APRA has viewed this setting as remaining prudent.” 

"As prospective homebuyers face soaring barriers to entering the property market, the timing of this call for change couldn’t be more critical. In a period where affordability is a pressing issue, it’s vital that lenders be able to adapt their strategies to assist customers rather than hinder them," adds Wastell.

"By advocating for a more flexible approach to serviceability, the banking industry could open doors for first home buyers and free mortgage prisoners trapped in higher rates."

Mozo Analysis shows LMI Another Costly Catch-22 for Buyers

In line with the ABA's appeal for increased flexibility, Mozo has unveiled new research highlighting another significant obstacle for buyers—the unavoidable cost of Lenders Mortgage Insurance (LMI) imposed on those unable to secure a 20% home loan deposit.

Mozo research reveals only 12% feel confident in saving that amount while 47% believe they can save a 5% deposit. A staggering 84% of Australians saving for a house deposit said they couldn’t save the 20% needed to avoid LMI.

“Buyers unable to save the substantial deposit required to avoid LMI face a double-edged sword: while they struggle to save the necessary funds, they also incur tens of thousands of dollars in insurance costs that protect the lender, not them,” explains Wastell.

"LMI is a necessary evil for many buyers, but it often feels like a punishment for insufficient savings. Additionally, lenders choose the LMI provider independently of the borrower, meaning prospective homeowners can’t simply shop around for better rates or terms like they can with their home loan."

A Quarter of a Million Dollar Deposit is No Mean Feat

Mozo’s findings show that the traditional deposit amounts are increasingly unachievable for most Australians. According to the latest median dwelling price data the median property price now stands at $973,300, up from $949,400 in December last year and $649,300 in June 2019. 

That’s a whopping 50% increase in the median price of residential properties in just five years. For a borrower taking out a $400,000 loan with a 10% deposit, this translates to potential LMI fees of up to $33,000.

"This situation underscores the need for broader changes in lending practices," says Rachel Wastell. "Many borrowers are sacrificing daily needs to save for their deposits, only to face another financial hurdle when they’re finally ready to buy."

For more details you can read the media release here.

Mozo reveals the best performing and lowest fee super funds

In more uplifting news, Mozo launched its inaugural Superannuation Awards this week, identifying the top-performing super funds based on a rigorous analysis of APRA data,  looking at 397 super fund options from 53 different providers

Mozo aims to bridge the knowledge gap in super, as recent research* shows 40% of Australians do not even know their super balance, so these awards provide a great starting point for Aussies wanting to take control of their financial future.

Australia’s Best Super Fund: Colonial First State (CFS) won for its FirstChoice Wholesale Personal Super product, excelling across multiple performance metrics and securing eight total awards, including the Exceptional MySuper award.

Highly Commended: UniSuper was recognized for its exceptional performance, receiving nine awards and excelling in Conservative, Balanced, and Growth categories.

For a complete list of winners and insights into their performance, click here.

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As a part of Mozo’s commitment to making your money count for more, each month we “roundup” the rate changes, key banking trends and money moves in the Australian personal finance market. 

If you’d like to see the analysis in full once it’s released, you can subscribe to receive the Mozo Banking RoundUp here.

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*Mozo commissioned a nationally representative survey of 2,129 Australians aged 18 years and over, with information collected between 19 July and 5 August 2024  via Researchify.