Mortgagors continue to benefit from rate cuts

The impacts of the Reserve Bank of Australia’s decision to reduce the official cash rate in both June and July, coupled with new mortgage assessment criteria, has delivered rate savings to both investors and owner-occupiers, new research has found.

According to financial comparison site mozo.com.au, the average investor principal and interest (P&I) rate has dropped by 35 basis points since the changes came into play, bringing the average investor P&I rate down from 4.76 per cent to 4.41 per cent.

In monetary terms, this equates to a saving of $63 a month or more than $22,000 over the life of the loan (based on an investor with a $300,000 loan taken over 30 years), according to Mozo property spokesperson Steve Jovcevski, who stated: “The RBA’s decision to cut 50 basis points off the official cash rate this year and the removal of the APRA cap on interest-only loans has warmed up the paddles of life for property investors.”

Mr Jovcevski went on to highlight that investors with interest-only (IO) loans were also benefiting from lower rates, with the average interest-only loan dropping from its 5.12 per cent average two years ago, to an average of 4.69 per cent today.

However, he added that average investor IO rates are “still higher than [they were] before APRA introduced its cap in 2017”.

The financial comparison website also noted that investors were still seeing markedly higher mortgage rates than owner-occupiers, despite APRA having removed its speed limits for investor loans earlier this year.

For example, it found that the average owner-occupier P&I rates sat at around 3.99 per cent, 42 basis points lower than their investor counterparts.

Mr Jovcevksi went on to state: “While this rate relief is welcome news for investors, compared to owner-occupiers, they are still in the hurt locker. At a time when rental returns are under pressure, it’s still difficult to lay a solid foundation for investing in property…

“The investor loan market still has a lot of room to move in the coming months,” he said.

How rate cuts are impacting owner-occupiers and refinancers

Data from home loan platform Lendi has also noted that median interest rates have been steadily dropping for owner-occupiers.

The brokerage’s new Home Loan Report, which analysed more than 2,000 owner-occupier home loans settled between January and June 2019, has revealed that the median owner-occupier P&I rate is now 3.64 per cent, its lowest level so far this year and markedly down since its high of 3.81 per cent in January.

Moreover, the online brokerage found that borrowers who took out loans with smaller lenders were saving more money than those who settled with a big four bank.

According to the report, home owners who settled with a non-major lender in 2019 have median interest rates between 5 and 22 basis points lower than borrowers settling with a big four bank.  

For example, in June, owner-occupiers settling P&I loans with non-major lenders had a median interest rate of 3.57 per cent, while those using a big four bank had a median interest rate of 3.79 per cent.

Moreover, the median interest rate secured by borrowers for loans between 4 June and 12 July was found to be 3.45 per cent for non-major lenders, and 3.65 per cent for those with the big four banks. 

Perhaps unsurprisingly then, there has been an increase in the number of borrowers settling mortgages with non-major banks. In 2018, around 30 per cent of loans settled through the Lendi platform were with the big four banks, while only 24 per cent of owner-occupier P&I loans settled between January and July 2019 were with ANZ, CBA, NAB or Westpac, according to the report. 

Aside from sharper rates, non-major banks were also found to be assessing loans more quickly than the big four banks, with non-majors taking an average of 9.58 days to assess applications between January and June, compared to 10.86 days for the big four banks.

This year, the month of April (just before the federal election) saw a particular delay in mortgage assessments, according to Lendi, with non-major lenders taking 10.03 days to assess a loan, while major lenders took nearly two weeks (12.73 days).

By June, however, this had improved to 6.59 days for the big four banks and 5.3 days for other lenders.

Refinance activity on the rise

The analysis also found that the proportion of refinancers choosing a big four bank had fallen from 26 per cent in 2018 to just 19 per cent over the six months to June 2019 and that, over the period, home owners refinancing their P&I loans settled with a new median interest rate of 3.76 per cent. 

This represents an average interest rate reduction of 56 basis points through refinancing, or a saving of $162 a month or $1,944 in the first 12 months (for those with a mortgage of $340,000).

Lendi co-founder and managing director David Hyman commented: “The appeal of smaller lenders is growing as they consistently undercut the big four to offer median rates that are up to 22 basis points lower than the big banks.

“The [banking] royal commission shattered trust in the big institutions, and now we are seeing more borrowers opting to go with less established or newer brands because savings are winning out over brand loyalty.” 

Mr Hyman noted that the RBA rate cuts had also seen a surge in refinance activity, with the platform recording a 52 per cent increase in the number of people visiting the site to refinance in June 2019 (compared to May 2019).

“Within hours of the June RBA announcement, refinance activity picked up,” he said.

“The July cut has seen this momentum continue as home owners look to reduce their monthly repayments.”

Mr Hyman noted that the key reason borrowers said they were refinancing was to ease pressures of the cost of living (46 per cent) by reducing the size of their monthly repayments.

“The cost of living is a serious issue for thousands of Australian households, and what we’ve seen since the RBA cuts is borrowers looking to ease the pressure rather than take on more debt,” he said. 

[Related: Low rate environment entrenched until inflation spikes: RBA]