US Mortgage Rates Move Higher on Strong Economic Data

More evidence of upward pressure on mortgage rates on the back of positive economic news. All this adds weight to the view that Australian mortgage rates are more likely to rise down the track.

US Mortgage ratesmoved higher, following stronger economic data at home and abroad.  In general, stronger economic data implies better growth, higher stock prices and higher rates.  Although the traditional levels of correlation between data and rates have been thrown off for various reasons over the past year, we still see examples of that correlation from time to time.  Today was one of those days.


Economic data was stronger in Europe and Asia during the overnight session.  This resulted in bond markets moving toward higher rates even before the domestic economic data came out.  Today’s most significant domestic data was the ADP Employment report, which showed payroll creation of 250k per month compared to forecasts calling for 190k.  This speaks to the potential for Friday’s official numbers from the Labor Department (more important than ADP) to stage a similar performance (which would be bad for rates, all things being equal).

In today’s case, bond traders weren’t ready to send rates straight to the moon.  Bonds (which dictate rates) recovered most of their losses by the afternoon.  Several mortgage lenders adjusted rate sheets accordingly, but on average, today’s rates are the highest since last Tuesday.  Specifically, the average lender is quoting 4.0-4.125% on top tier scenarios (30yr fixed, conventional).

Westpac Cuts Mortgage Rates For New Borrowers

Westpac has announced a series of mortgage rate cuts to attract new borrowers, as it seeks to continue to grow its portfolio, leveraging lower funding costs, and the war chest it accumulated earlier in the year from back book repricing, following APRA’s tightening of underwriting standards and restrictions on interest only loans.

From Australian Broker.

Westpac and its subsidiaries have announced a number of rate cuts on select fixed rate mortgages for a limited time.

The changes will bring in lower rates on owner occupier and investor products and increase the introductory discounts on certain loans.

From last Friday (1 December), St George, Bank of Melbourne and BankSA have brought in the following rates for new lending:

Current Advantage package rate (p.a.) Change (p.a.) New promotional rate (p.a.)
2 year fixed owner occupier Principal & interest 3.85% -0.06% 3.79%
Interest only 4.24% -0.15% 4.09%
2 year fixed residential investment Principal & interest 3.99% -0.10% 3.89%
Interest only 4.49% -0.40% 4.09%
3 year fixed owner occupier Principal & interest 3.94% -0.05% 3.89%
Interest only 4.34% -0.15% 4.19%
3 year fixed residential investment Principal & interest 4.19% -0.20% 3.99%
Interest only 4.49% -0.30% 4.19%

Basic owner occupier principal & interest promotional rates have also been reduced across Westpac’s subsidiaries as follows:

Basic owner occupier P&I Old rate (p.a.) Change New rate (p.a.)
St George 3.78% -0.10% 3.68%
Bank of Melbourne 3.78% -0.14% 3.64%
BankSA 3.78% -0.14% 3.64%

Westpac itself also brought in a number of changes, effective from 4 December on new lending, by increasing the two-year intro discounts on its two and three year fixed option home and investment property loan rates.

Product Repayment Current rate (p.a.) Change Promotional rate (p.a.) Promotional comparison rate (p.a.)
2 year Fixed options home loan P&I 3.88% -0.09% 3.79% 4.86%
IO 4.39% -0.30% 4.09% 5.38%
Fixed rate investment property loan P&I 4.19% -0.30% 3.89% 5.31%
IO 4.59% -0.50% 4.09% 5.75%
3 year Fixed options home loan P&I 3.99% -0.10% 3.89% 4.82%
IO 4.49% -0.30% 4.19% 5.32%
Fixed rate investment property loan P&I 4.24% -0.25% 3.99% 5.23%
IO 4.59% -0.40% 4.19% 5.64%

The bank has also increased the two-year offer discount on its flexi first option home for principal and interest repayments from 0.84% p.a. to 1.00% p.a. putting the current two-year introductory rate at 3.59% p.a.

A Westpac spokesperson said the bank was pleased to launch these competitive rates for new lending across the group to support Australians purchasing a new home in a responsible manner.

“We know many Australians begin thinking about purchasing a new home as the year draws to a close and they look ahead to the new year and a fresh start.”

Heritage Bank Cuts New Mortgage Rates By Up To 50 Basis Points

From The Adviser.

Heritage Bank has announced that it has cut interest rates by up to 0.50 per cent on a range of its home loan offerings, with owner-occupier rates as low as 3.89 per cent. The cuts came into effect on Monday, 27 November.

Interest rates for Home Advantage variable owner-occupier loans with an LVR of less than 80 per cent have been cut by 0.10 per cent, with rates for $150,000 to $250, 000 loans now at 3.99 per cent, $250,000 to $700,000 loans at 3.94 per cent, and loans over 700,00 now at 3.89 per cent.

Investment Discount Variable Principal & Internist loans over $150,000 and with an LVR of less than 80 per cent have been cut by 0.30 per cent to 4.19 per cent.

First and second-year fixed rates for P&I investment loans have been cut by 0.20 per cent to 4.29 per cent.

Fixed rates for interest-only loans have also been cut, with rates for the first and second year cut by 0.40 per cent to 4.49 per cent.

Three-year and five-year fixed rates have also been reduced by 0.50 per cent to 4.49 per cent and 4.89 per cent, respectively.

CEO of Heritage Bank Peter Lock hopes that the decision will attract new customers to the regional lender.

“We’ve cut our rates to ensure we remain right in the sweet spot for competitiveness in the home loan market and to encourage even more people to enjoy the benefits of our people-first approach,” Mr Lock said.

“We do want to build and keep attracting new customers to the bank as part of a nationwide growth strategy.

“We’re a national player in the mortgage market via our broker partners, and our reduced rates, along with our overall service proposition, make us a great alternative for anyone in the market for a home loan.”

Heritage recently became the 22nd member of Aussie Home Loans’ lender panel, which Mr Lock believes will grant the bank access to more than 1,000 brokers across Australia and help the lender achieve its “national growth aspirations”.

Virgin increases P&I rates

Virgin Money has announced changes for two of its principal and interest loan products, effective from 27 November. Of course, Virgin Money (Australia) Pty Limited promotes and distributes the companion account and the home loans as the authorised representative and credit representative of the issuer and credit provider, Bank of Queensland Limited.

More evidence of mortgage margin pressure.

Australian Broker says This will increase the rates of the lender’s special offer 3 year fixed rate loans for owner occupiers and special offer 2 year fixed rate loans for investors.

The changes below apply to new applications with LVR 90% or under received in Apply Online from 27 November for loans of $300,000 or more.

These changes will not affect loans in the pipeline if they were applied prior to 27 November. All these should have all supporting documentation within 24 hours of prior application to be eligible for these prior rates.

Virgin Money Cuts Mortgage Rates For New Customers

From The Adviser.

Virgin Money, the Bank of Queensland-owned lender has this week reduced its variable rates for both owner-occupiers and investors and increased the maximum LVR for interest-only mortgages.

Effective from 1 November, Virgin Money will be decreasing variable owner-occupied principal and interest (P&I) and interest-only (IO) rates (for LVRs equal to or under 80 per cent) and variable IO rates for new applications submitted in ApplyOnline.

Also effective this week, the lender’s maximum LVR on owner-occupied IO loans has increased to 80 per cent. The rate changes are as follows:

Owner-occupied – principal and interest (P&I)

Current rate (p.a.) Change New rate (p.a.)
Borrowings $75,000 to $499,999 3.89% -0.21% 3.68%
Borrowings $500,000 to $749,999 3.84% -0.16% 3.68%
Borrowings $750,000 and above 3.79% -0.15% 3.64%

Investment – Interest-only (IO)

Current rate (p.a.) Change New rate (p.a.)
Borrowings $75,000 to $499,999 4.69% -0.16% 4.53%
Borrowings $500,000 to $749,999 4.64% -0.11% 4.53%
Borrowings $750,000 and above 4.59% -0.06% 4.53%


Teachers Mutual Bank Lops 30 Basis Points Off New Mortgages

From Australian Broker.

Teachers Mutual Bank’s Classic Home Loan variable rate has today been cut by 30 basis points to 3.84% for new business across its three key brands: Teachers Mutual Bank, UniBank, and Firefighters Mutual Bank.

Fixed rates across a number of home loan products have also been cut for all brands. Two year fixed rate home loans will drop to 3.69% p.a. (15 basis points). Four and five year fixed rates home loans will be reduced by 22 basis points to 4.36% p.a. and 4.49% p.a. respectively. These fixed rate changes will effect both new business for owner occupier on principal and interest payments. Interest only loans for owner occupied purposes will also be reduced by the equivalent to 4.38% p.a. (2 Years), 4.76% p.a. (4 years) & 4.89% p.a. (5 Years).

“We always seek to provide some of the most competitive rates on the market, and these new rates achieve that aim”, said Teachers Mutual Bank’s head of third party distribution, Mark Middleton.

“These changes provide customers an opportunity to lock in a very reasonable home loan rate with Teachers Mutual Bank, UniBank or Firefighters Mutual Bank. The incentive to join us increases once you consider these loans are supported by our 100% mortgage offset facility, our high levels of customer service, and our environmental credentials”, said Middleton.

These rate changes follow on from Teachers Mutual Bank Limited’s recently announced annual results, which highlighted the brand’s strong home loan performance, with first and third party lending growing by a total of 19.23% in 2016-2017.

“Our third party channels are a strong area for business growth for us, and our engagement with the broker community will be a continued focus as we grow our portfolio and our brands over the next year. These rate changes are a positive step in building that growth”, said Middleton.

What happened to home loan rates a year on from APRA’s changes

Our friends at Mozo have written a highly relevant blog post for DFA on the impact of the APRA changes.  No wonder, some households are under pressure! And thanks to Mozo for their insights!

There’s been a reasonable amount of ups and downs in home loan interest rates over the last 12 months, especially considering the official cash rate hasn’t changed since August last year. Many of those changes served to draw clear lines between borrower and repayments types, as banks aim to cut back on risky lending after APRA updated regulations earlier in the year. The changes included a 30% cap on new interest-only lending and a mandate for stricter limits on interest-only loans with LVRs above 80%.

And the different interest rate changes between borrowers types have been pretty dramatic. While at one end of the scale, owner-occupiers making principal and interest repayments saw hardly any change, on the other, riskier, end, investors with an interest-only loan – who perhaps saw the biggest changes thanks to APRA’s updated rules – have been hit by the equivalent of more than two typical RBA rate hikes.

Here’s a full breakdown of the movement in different rate types over the 12 months from October 2016 to today.

Owner occupiers making principal and interest repayments – 0.01% increase

People buying their own home and paying off the principal and interest each month have fared the best over the past year, with an increase of just 0.01%, bringing the average rate to just 4.03%.

That’s good news, since according to analysis done by ASIC, the majority of owner occupiers fall into this category. Even better news is that the lowest rate around at the moment for this borrower group is 3.54% – 0.10% higher than it was in October 2016, but still a very competitive offer.

This very minimal rate change over a 12 month period in part reflects the fact that this group is the least risky from a bank’s perspective. Unlike other rate types, there was a pretty even split between the number of lenders who increased rates (30) and those who decreased (33).

Owner occupiers making interest only repayments – 0.25% increase

According to ASIC, one in four owner occupiers have an interest only loan. Unlike loans with principal and interest repayments, in this category there was an undeniable trend toward rate increases, with 40 lenders raising rates, while just 5 lowered them over the 12 month period from October 2016. This points to the extra risk interest only repayments pose for banks.

Borrowers in this category have been hit by an average rate increase of 0.25%, equal to a typical RBA rate hike. The average interest rate went from 4.15% in October 2016, to 4.40% today.

On a $500,000 home loan that change equates to $1,250 of extra interest per year.

Investors making principal and interest repayments – 0.27% increase

Investors are often hit harder by rate increases, and with APRA regulations tightening around new lending to ‘riskier’ borrower types, this year has been no different.

Rates rises for investors making principal and interest repayments were more or less on par with owner occupiers on an interest only loan, with an increase of 0.27%, to 4.61%. That change meant an extra $1,350 in interest over a year long period for those is this rate category.

This is a bit more than the equivalent of a Reserve Bank rate rise, reflecting the level of risk lenders see in investment lending. Again, there was a trend toward increases by lenders (53) rather than decreases (8).

Investors making interest only repayments – 0.53% increase

Where investors making principal and interest repayments saw a little over the equivalent of one typical RBA rate rise in the last 12 months, rates for interest only investor loans went up by an average of 0.53% – or more than two times an RBA rate rise.

There was an overwhelming trend towards lenders increasing instead of decreasing rates in this category as well, with just 1 lowering rates, while 45 hiked.

That brought the average rate from 4.39% in 2016 to 4.92% this year, a change that meant a whopping $2,650 of extra interest paid on average. Not only is this rate increase bigger than that for other borrower types by a pretty large margin, but it also likely affected more people, considering ASIC data found two in three investment borrowers have an interest only loan.

What this means

While the banks have the prerogative to protect themselves against riskier lending by imposing higher premiums, overall I’d argue that the rate changes over the past year have potentially had a negative effect on the wider economy.

Most borrower categories saw rate increases equivalent to one or more Reserve Bank hikes, which can have a significant impact on household budgets – and the economy overall. As more money goes toward home loan repayments and borrowers brace for more rate hikes to come, consumer confidence drops, and the economy starts to stall.

And that’s bad news for everyone, risky home loan or not.

About the Author: After starting his career working for the banks, Peter Marshall has spent the last 15 years helping consumers compare financial products. At Mozo he manages the Data Team which keeps track of banking, insurance and energy products in Australia.

How Much Can Mortgage Holders Really Save By Refinancing?

We showed recently that households with specific post codes may have significantly higher mortgage rates than their neighbours. As a result, significant savings may be made by seeking out a mortgage with a better rate.

Of course households need to be careful, as they may incur transaction costs, and even break costs if the loan is fixed.

But we went though our Core Market Model looking at those who refinanced in the past year. We then calculated the annual savings they had, on average achieved. Here are the results:

The larger the loan, the bigger the potential saving, which is why there are state variations. There were quite big differences between the old rate and new rates, and we incorporated break costs where appropriate.

This again highlights that households should be checking their rates and seeking out better, lower rates. Substantial savings are available, and when we consider the average loan life is more than 5 years, the potential savings are significant.


Time to Haggle

From The Real Estate Conversation.

It pays to haggle on your mortgage. Mystery shopping by mortgage comparison site Mozo has found that the Big Four banks are offering discounts of up to 0.82 per cent to customers who ask for a better deal.

Haggling for a better rate on your mortgage could save you hundreds of thousands of dollars over the life of your loan.

Mystery shoppers from online mortgage comparison site, Mozo, have found that the Big Four banks are offering discounts of up to 0.82 per cent to those who ask for a better rate on their loan.

And that’s not all. Some banks are offering incentives such as cashbacks and frequent flyer points to borrowers.

Mozo staff posing as first homebuyers, investors and refinancers asked for discounts at each of the Big Four banks. The potential savings they found were significant: a homebuyer had the potential to save $45,000 over the life of their loan, and a refinancer could save up to $86,000.

“We urge you to haggle,” said Mozo Property Expert, Steve Jovcevski.

“All four big banks were prepared to move on interest rates when pushed, even for investors,” he said.

In 2015, the mystery shoppers who posed as investors weren’t offered any discounts, he said.

“Given APRA’s recent clamp down on interest only loans allowing no more than 30 per cent of new residential mortgage loans to be interest only, we are surprised to see that banks are offering such competitive rates to potential investors,” said Jovcevski.

The survey found that the Commonwealth Bank offered the most competitive rates for first-home buyers, refinancers and investors. The Mozo mystery shoppers said the bank was ‘very keen’ to give a discount.

Mozo home loan mystery shop discounts

Source: Mozo.

  • For refinancers, discounts from 4.62% to 3.80% were on offer, equating to $2,873 in savings each year on a $500,000 loan.
  • For first-home buyers, a discount of 4.72% down to 4.00% resulted in a savings of $1,527 per year on a $300,000 loan.
  • For investors, the discount from 5.54% down to 4.82% results in a whopping $7,200 in savings per year on a $1,000,000 loan.

Westpac was the hardest of the Big Four to negotiate with. It only offered to price-match rates from other banks.

Ask, and you shall receive, says Mozo.

Data Shows Mortgage Rates Vary Within The Same Post Code

New research from HashChing and Digital Finance Analytics shows a
massive discrepancy in home loan interest rates across NSW, with vast differences in rates even within the same suburbs.

Data shows that in some cases, neighbours are paying up to $87,027 more for new owner occupied loans (105 basis point disparity), and $201,704 more for refinanced owner occupied loans (235 basis point disparity). The calculation is based on an average home loan of $500,000 over 25 years.

Those borrowers paying higher rates are essentially adding an extra three years of mortgage repayments (34 months) compared to those on a lower rate.

According to Mandeep Sodhi, CEO of online mortgage marketplace HashChing, borrowers are more empowered to take control of their finances than ever, but need to be more proactive when it comes to their home loan.

“The data shows that the highest and lowest rates are not confined to single suburbs, suggesting location is not the be all and end all when it comes to interest rates. In fact, at the time that the data was recorded, the lowest rate, 3.49 per cent, was available all over Sydney, including the Eastern Suburbs, Sydney CBD, North Shore, Inner-West, Northern
Beaches and South Sydney.

Multiple suburbs were also found to have both the lowest and highest interest rates on the same type of loans for their region. For example, homeowners in Artarmon had the lowest and the highest rates on the North Shore for refinanced investment loans, and new owner occupied

The lowest new owner-occupied rate in Artarmon was 3.94 per cent, on a loan amount of $950,000. While the highest was a rate of 4.45 per cent, for a lower loan amount of $600,000. And, although the loan size for both the highest and lowest rates for refinanced investment loans was the same ($420,000), the lowest rate was 3.85 per cent and the highest was 5.79 per cent, that is a leap of 1.94 per cent.

According to Martin North, Principal of Digital Finance Analytics, the amount that households pay is determined by a range of factors: whether it is a new loan or a refinanced loan, where the property is located, the type of loan, the loan to value ratio, and how the loan is negotiated.

“Borrowers shouldn’t necessarily take the first rate they are offered. It is not in a lender’s interest to automatically offer the golden egg. Rather, a negotiation has to take place, and borrowers have to have an appetite for it.

“The lender is providing a service for you, so be prepared to negotiate, or use a broker to help get the best deal,” said Mr North.

Those who have already settled on a home loan were also called to be more proactive in reviewing their rate and situation frequently.

“Too often borrowers have a ‘set and forget’ mentality when it comes to their mortgage. What they don’t realise is you can actually renegotiate a better rate with your current lender, or switch providers entirely which can save thousands, often completely outweighing any switching costs that may be involved,” said Mr North.

The data indicated that new owner-occupied loans across Sydney CBD, Northern Beaches and Western Suburbs all had average interest rates above 4 per cent, while South Sydney (3.95), Eastern Suburbs (3.94), Inner West (3.89) and North Shore (3.86) sat just below.

The average refinanced owner-occupied rate in the Inner West was a high 4.12 per cent, followed by the Eastern Suburbs (3.99) and North Shore (3.95).

The average loan size for those refinancing was $341,603 and the average loan size for a new home was $958,222 – with Northern Beaches and Western Suburbs residents borrowing the most.

* Note, high rates due to poor credit history or unique circumstances were removed from the data before analysis.