Your mortgage is likely to be your single biggest monthly expense and yet you might (like many people) struggle to know what interest rate you are paying, let alone whether or not you are getting a ‘good deal’.
The difference in interest rates can be significant. The best rate in the market at the moment (after the recent rate cut) is around 3.8% and the highest rate (for low doc loans) are over 6.0%. A whopping variation of 2.4% ($12,000 in interest per year on a $500,000 loan – cash you would much rather have in your back pocket!!).
What impacts on the interest rate of your home loan?
There are several factors that will impact on the interest rate you have from your lender;
- The features you want
- The total amount you are borrowing
- The Loan to Value Ratio (LVR)
- Principle and Interest or Interest Only
- Owner Occupied or Investor
As with many things in life, when it comes to a Home Loan you generally get what you pay for. If you want to buy a new car, you can choose to pay a little extra for DVD players, leather seats, carpet and window tint. With a Home Loan, it is no different except the sort of features that you will be looking at include Offset, Redraw and Fee Free Credit Cards.
And the reality of Home Loan pricing is that consumers tend to pay a premium for convenience. If you want to have all of your banking within the same institution, seamlessly linked as much as possible you will generally be getting a Home Loan package and this may come with a slightly higher interest rate to cover these features.
For example, a no frills home loan only available through a broker could be as low as 3.88% and a full package loan through the big lenders will be somewhat more expensive, anywhere from 4.2% upwards.
2) Total borrowing amount
Generally the higher the amount of money you are borrowing, the larger the discount the big banks will be willing to offer you off their standard variable rates (subject to their other criteria, more on that later). The non-bank lenders don’t tend to offer these same discounts as their advertised rates already incorporate a discounted rate.
For example, with a recent home loan over $1.0 m, I negotiated a discount of 1.3% off the standard variable rate, reducing the standard variable rate down to 4.26%. Another client, with a total borrowing of $400,000 the discount negotiated was 1.1%, taking the standard variable rate down to 4.38%.
3) The Loan to Value Ratio (LVR)
The smaller the loan in relation to the value of the property the better the price generally available. The best discounts will be available for LVR’s that are 80% or below. The higher your LVR gets, the higher the risk to the lender, so the lower the discount. And in some cases, if the LVR is too high (over 95%) the banks won’t lend at all, let alone offer discount.
4) Principle and Interest or Interest Only
Principle and Interest loans will attract higher discounts than Interest Only Loans. The regulator (APRA) sees interest only loans as somewhat risky and fueling speculative investment. They want to see borrowers paying down loans and have put pressure on lenders in recent years to reduce the availability of interest only loans.
For example, a client recently wanted to change over their investment loan from Interest Only to Principle and Interest in order to reduce interest payments and the discount increased by 0.2%.
5) Owner Occupied or Investor
In July 2015, the regulator (APRA) imposed guidelines on lenders to take the heat out of the property market by restricting the growth in investor lending to under 10% a year. This now means that borrowing for investment purposes now attracts a premium, and most lenders have separate rates for investment loans to owner occupied loans.
For example, the current standard variable rate for ANZ is 5.56% for Owner Occupied and 5.83% for Investors (a difference of 0.27%).
And the impact of set and forget!
And a final word – borrowers who don’t regularly review their lending will also pay a premium as discounts offered years earlier may now be well below that available in the market today. Banks have relied on people to ‘set and forget’ and it’s the age old saying “don’t ask, don’t get”.
One of my clients had been paying 4.93% on an investment loan (with a discount of 0.9% that had been put in place 3 years ago). With additional negotiation I was able to reduce the rate to 4.58% (a total discount of 1.25%) saving over $3,000 per year in interest.
What rate do you have currently? Do you think it is a ‘good rate’?
If you aren’t sure, the best way to know if you have a ‘good rate’ is to get in touch for a free, no obligation, 30 minute home loan health check.
You can contact Doug at (e) email@example.com or (m) 0408 671 524.
Douglas Piening is a Mortgage and Finance Broker with Choice Home Loans and is passionate about providing clients with lending advice they can trust. Whether it’s re-financing an existing property, buying a new or next home, or investing, he brings a wealth of knowledge and expertise to assisting clients with their lending needs.
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This information is of a general nature only and does not constitute professional advice. You should always seek professional advice in relation to your particular circumstances.