Weaker than expected inflation figures for the March quarter, released last week, have given economists confidence that the Reserve Bank of Australia will leave interest rates on hold for at least a few months to come.
The official cash rate has been at a record low of 2.5% since August last year. Throughout that time, the mortgage managers’ basic variable rate – which approximates the average of interest rate available to borrowers – has been constant at 5%. But there are many home mortgages available that offer interest rates below 5%.
The tables below list some of the cheapest variable interest rate loans in the market for owner occupiers (current as of April 24, 2014).
|Company||Product||Comparison rate||Headline rate||Offset facility?||Redraw facility?|
|Loans .com.au||Dream Home Loan||4.51%||4.49%||Yes||Yes|
|Yellow Brick Road Wealth Management||Rate Smasher||4.69%||4.68%||No||Yes|
|Bankmecu||Basic Variable Special||4.69%||4.69%||No||Yes|
|State Custodians||Breathe Easy Offset||4.75%||4.84%||Yes||Yes|
Sources: Canstar, Ratecity.com.au, Finder.com.au, Infochoice.com.au, lenders’ websites.
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The loan to value ratio (LVR) is the loan amount relative to the value of the property. For example, if a borrower takes out a $300,000 loan to buy a $400,000 property, the LVR is 75%.
Results are sorted by comparison rate rather than the headline interest rate because the comparison rate includes fees and charges which vary from loan to loan, so it better reflects the cost of the mortgage.
Comparison rates are calculated using a formula governed by the Uniform Consumer Credit Code that standardises factors such as the loan amount; loan term; repayment frequency; and fees such as ongoing account-keeping charges, establishment fees, valuation fees, mortgage documentation fees and settlement fees.
The comparison rates used in these examples are based on a $150,000 loan repaid monthly over 25 years. Results will vary for other loan sizes, terms and repayment frequencies, or select specific features to include.
Several fixed rate loans are also available with rates below 5%. The three listed below are just some of the products on offer.
Loans.com.au has two-year and three-year fixed rate mortgages with comparison rates of 4.59% and 4.68%, respectively. Those loan rates are based on $150,000 loans with 25-year terms, and are available to both owner-occupiers and investors borrowing up to 90% of the property’s value.
Pacific Mortgage Group has two, three and five year mortgages with a comparison rate of 4.75%. Those loans are available for owner occupiers or investors with loans up to $2 million, borrowing up to 75% of the property’s value over between five and 30 years.
UBank is offering a three-year fixed rate mortgage with a comparison rate of 4.83%. It’s available for loan sizes between $100,000 and $1 million, for people borrowing up to 80% of the property’s value over 30 years.
Tips on shopping around
When using comparator websites – such as Ratecity.com.au, Finder.com.au and Mozo.com.au – be aware that unless you can specify the details of the loan you wish to take out, the results may not exactly reflect what you will be able to access.
For example, the Yellow Brick Road Rate Smasher mortgage (see table) is only available when the loan amount represents no more than 70% of the property’s value: that is the loan to value (LVR) ratio is no more than 70%. For other LVRs, different rates may apply.
Different types of loans are available to investors compared with owner occupiers, while self-employed people may find they are only able to access low-documentation loans, which tend to have higher interest rates.
Specials may be offered to some groups but not others, or may be available for a limited time only. So check fairly regularly for new deals if you have been looking for a property for some time.
Also, be aware that some comparison websites have relationships with only some of the lenders in the market so you may be missing the best deals if you refer to only one source.
When picking a loan, it’s a good idea to look beyond the interest rate and consider whether there are mortgage features that you might be able to exploit to reduce the borrowing cost over the life of the loan.
Holding emergency savings in an offset account, for example, can save significant sums over time. This is because the balance, for the purposes of interest calculations, is accounted for as if you had paid that amount off the loan principal.
Online calculators are available that can help you work out how much the savings would be. For example, Westpac’s Home Loan Offset Calculator shows that if you had a $300,000 mortgage that charged a rate of 5%, you would pay $226,581 in interest over 25 years. If you held $30,000 in an offset account against that same mortgage, you would save $63,505 over the life of the loan and repay the debt three years sooner.
This article first appeared on Property Observer.