The mortgage-holders raking in the savings
Lenders have gone rogue on rates.
In fact, they did it long ago.… it was really the GFC that saw them start to hike, hold and hold back on whim, rather than on Reserve Bank announcement.
But the upshot of all those maverick moves, and the more recent Covid-19 rate revisions, is there is now one distinct group of mortgage winners: owner-occupiers paying principal and interest on their home loan.
Owner occupiers’ edge
First up, there have in recent years been concerted moves by the home loan watchdog to try and cool investment activity in the property market.
The Australian Prudential Regulation Authority (APRA) initially capped the growth in investment lending that any bank or lender could enjoy at 10 percent a year.
Then it implemented a restriction on risky loans themselves: limiting the proportion of new mortgages that could be made up of interest-only loans, to 30 percent. These loans do not see the principal owing fall… and therefore maintain borrowers’ debt at the initial level.
After this latest crackdown, which happened in 2017, there was a sharp fall in interest-only lending from its high of 40 percent of all new mortgages written.
And thank goodness as many owner-occupier borrowers had even started using interest-only loans, I suspect on the advice of mortgage brokers who wanted to keep their commissions high. The royal commission into banking was scathing of brokers.
A home should always be on a principal-and-interest basis, so you can eventually call it your own.
Now, both these APRA measures were scrapped in early 2018 as the property market cooled as hoped. But…
Investors and interest-only borrowers are still slugged
Despite the watchdog taking its foot off the borrowing brake, new research from data house Mozo shows lenders have taken the opportunity to stick to premium pricing in these two areas.
And it’s investors with interest-only loans who are suffering the most.
Firstly, owner occupiers who are paying both the principal and interest on their home loans are being rewarded with lowest average interest rates 68 basis points below those who pay interest-only. The average lowest rate is 2.87 percent (note this is an average of the single best rate offered by each provider in the Mozo database).
So what’s the far sadder story for investors? Well, paying principal and interest versus interest-only earns you a tiny discount – just 29 basis points to an average lowest rate of 3.28 percent.
And that rate is a full 41 basis points more expensive than what owner occupiers who are paying debt down can get.
Homeowner who are actually paying off their loans can do even better than the above, too. Mozo found the leading variable rate is just 2.19 percent, 168 basis points below the average interest-only rate (but be aware that all the cheapest lenders from the table below do not offer real offset accounts, even where they label them as offsets – they are simply redraws in disguise).
Heard all the hoohah about mortgage rates that start with a “1”? That’s only an introductory rate that applies for a year so has been excluded. A low rate at outset will never make up for a high rate throughout… remembering that you should be refinancing every three years anyway.
So what’s the bottom line? Against an average owner occupier, P&I rate of 3.38 percent, the best 2.19 percent rate would save you $73,255 on a $400,000 loan.
Better still, do what I call up stumps but still stump up – move your mortgage but keep your repayment at the existing level – and you’d save an extra $20,110 and slash four years off the length of your loan.
So is this pricing justified or unfair?
With the Reserve Bank shaving 50 basis points off the official cash rate since March and a wholesale interest rate available to lenders of 0.25 percent, they certainly have room to move when it comes to attracting the type of customers they want. And price their loans attractively.
“If you’re living in your home and you are in a position to pay principal and interest, the banks want you on their loan books,” says Mozo Director Kirsty Lamont.
“With the financial pressures caused by COVID putting mortgage holders and house prices under pressure, if you can afford to pay the principal, comparing what’s on offer and banking a rate down around 2 percent will ultimately leave you in a better financial position.”
What if you are tempted to switch to interest-only purely because you’re cash strapped and need to cut costs? You may well be unable to.
In a letter sent by APRA to the banks in 2018, the regulator said it still viewed interest-only loans at a “higher risk” form of lending. It demanded “prudent internal limits” on future interest-only loans.
However, you may be able to fashion a DIY interest-only loan for a short period… by applying for a mortgage repayment holiday. All you need do is manually pay the interest that would instead accrue every month, to save you ultimately repaying a fortune extra.
And hopefully, that will give the financial lee-way to get to the other side of this crazy coronavirus thing.