Borrowers who rethink bank relationship could save $100,000

Despite the banks offering vastly different mortgage lending rates that could amount to $100,000 over the course of a home loan, refinancing activity has slipped.

Research by Canstar also revealed that more than one-third of homeowners and investors say they’re not prepared to sustain mortgage interest rates if remain at the current level for the rest of the year.

With the RBA hinting that a rate cut is still not likely in the next six months, with even a rate hike remaining on the cards, borrowers are ill-placed to settle for higher interest rates that could be gifting away tens of thousands of dollars in extra interest payments over the life of their loans.

Canstar’s finance expert, Steve Mickenbecker had a Valentine’s Day analogy to highlight where borrowers might be going wrong.

“Settling for too long in a loan with an interest rate that you haven’t reviewed in years can lead to heartbreak after realising you could be paying away close to $100,000 or a lot more in interest that isn’t necessary.”

“Valentine’s Day roses can set you back $70, chocolates $20, dinner $150 or you could give your significant other their half share of the $100,000 saving potentially available by switching to a low interest rate loan.

“It feels like loans are forever and this is the gift that keeps giving,” Mr Mickenbecker said on Wednesday (14 February).

The Reserve Bank’s lenders’ interest rate data shows many existing borrowers are settling for higher interest rates.

“There are 19 variable interest rates below 5.75 percent listed on Canstar and sure, you may not qualify for the absolute lowest rate in the market but getting a rate below 6 percent is where the game is at.”

The major banks are now all forecasting the next move from the RBA will be a rate cut later this year. The impact of a 0.25 per cent cash rate cut could reduce monthly repayments for a $600,000 loan over 30 years by $101 down to $3,984.

Despite the Reserve Bank of Australia keeping rates on hold at their February meeting, some banks are still inching up their home loans (but none have raised their savings rates).

In the past week, four lenders increased variable rates by an average of 0.09 per cent while two lenders cut variable rates by an average of 0.53 per cent.

There are 19 rates below 5.75 per cent on Canstar's database.

The lowest variable rate for any LVR is 5.69 per cent, which is offered by Australian Mutual Bank, but only as an introductory rate.

Australian Unity increased one fixed rate by an average of 0.35 per cent, while five lenders cut fixed rates by an average of 0.18 per cent.

Can a rate cut offset rising property prices?

For prospective property buyers waiting for rates to fall before committing to a property purchase, it’s worth recognising that something strange is unfolding in the relationship between interest rates and property prices.

It may not be the typical Valentine’s Day sentiment but interest rates and home values typically have an inverse relationship.

Rising rates reduce borrowing capacity and demand for debt and increase the cost of servicing a mortgage. This can contribute to a slowdown in housing demand. The opposite is true in that when interest rates are falling, prices tend to rise.

But take a look at the orange highlighted time period in the graph below and it’s evident a trend that has been consistent since 2004 has unravelled over the past year.

Eliza Owen, Head of Research Australia at CoreLogic, said that initially, home values had a strong reaction to rate rises, falling 7.5 per cent between April 2022 and January 2023. However, by November last year, home values rebounded to new record highs. This coincided with five further cash rate increases in 2023.

So how was it that home values continued to rise amid increased cost of debt?

“Other factors have underpinned pressure on housing values, including a strong bounce-back in population growth from mid-2022, when international border restrictions eased and net overseas migration soared to 518,000 in the 2022-23 financial year,” Ms Owen said.

“Tight rental markets may have also been at play, with unusually high rent growth and low vacancy rates prompting more people to purchase housing.”

This is not the first time the interest rate-value growth relationship has broken down, with home values rising fairly consistently against higher cash rate settings between 2004 and 2008.

“This coincided with a strong economic cycle between 2004 and the start of 2007, aided by a mining boom, in which the national unemployment rate fell from 5.5 to a low of 4.2 per cent,” Ms Owen said.

“It also coincided with rising net overseas migration, which culminated in a pre-Covid peak of 93,462 in the March quarter of 2008.”

On a national level, the graph above shows the monthly growth in values slowing from mid-2023, suggesting an extended period of high interest rates may once again be weighing on value growth.