How to take advantage of low interest rates
Savvy borrowers who are on the lookout for better mortgage deals are turning to smaller lenders to save money.
Australia's customer-owned banking sector's portion of housing loans climbed by 7.8 per cent in the 12 months to June, in contrast to the major banks whose share grew by just 2.6 per cent.
However, the big four banks still dominate, holding 82.1 per cent of all housing loans in June, according to banking regulator data.
Customer-owned lenders - such as credit unions and mutual banks - held 5.4 per cent of mortgages and other lenders had 12.5 per cent.
Home loans are a hot topic after three Reserve Bank of Australia interest rate cuts since June pushed borrowing costs to record lows. Another RBA rate decision is due tomorrow.
A spotlight was put on the big four banks last month when they failed to pass on the RBA's 0.25 per cent cash rate cut in full.
The big four lenders - the Commonwealth Bank, Westpac, ANZ and NAB - passed on cuts between 0.13 and 0.15 percentage points.
Simmone Le Raye, 39, is among those who have opted to try smaller banks.
Earlier this year she refinanced her three-bedroom home, switching her mortgage from NAB to lender ME.
Paying an exorbitant interest rate of 4.76 per cent, she said to her husband Michael: "Let's get away from the big four banks and look elsewhere.
"We went from paying 4.76 per cent down to a three-year fixed rate of 3.73 per cent," Mrs Le Raye said.
We are now paying $90 less per week than when we were with NAB."
The pair consolidated their credit card debt into their mortgage and also purchased new furniture, taking out a loan of $260,000. Their repayments fell to $270 per week.
Treasurer Josh Frydenberg last month ordered the consumer watchdog, the Australian Competition and Consumer Commission, to investigate the refusal of the big banks to pass on the recent spate of interest rate cuts in full.
The Customer Owned Banking Association's director of strategy, Sally Mackenzie, said the financial services royal commission had "highlighted the benefit to look around at other providers in the market".
"The other thing that prevents people from switching across is people have very busy lives and there is quite a lot of confusion: there are more than 4000 products out there," she said.
"There are some really good alternatives out there in the market if people look beyond the big four."
Canstar found on a $300,000 30-year home loan the average variable rate for the big four banks was 4.01 per cent compared with 3.82 per cent for the rest of the market.
For a borrower paying 4.01 per cent, their monthly repayments would be $1434 compared with those on 3.82 per cent paying $1401. It's a saving of $11,770 over the life of the loan.
Mortgage Choice broker Scott Bament said he was writing a lot of loans with smaller lenders.
"I think the big four banks have lost a lot of trust," he said.
"Customers are more than happy to look at other institutions."
Mr Bament said owner-occupier borrowers paying principal and interest should be looking for rates "in the very low threes".
TIPS FOR SAVERS: Aussie John's secrets on interest
Making small savings is the first big step to benefit from record-low mortgage interest rates, says the man who was pivotal in bringing cheaper home loans to Australians 25 years ago.
When John Symond started Aussie Home Loans in the 1990s, big banks cut their own mortgage interest rates by 2-3 per cent as lending competition intensified.
Since then there's been a stack of rate cuts from the Reserve Bank, and Mr Symond says the path to success has changed little in almost three decades.
"People have to be aware that every little bit counts," he said.
A few dollars spent on daily lunches, coffees, entertainment or other small lifestyle costs adds up to thousands of missing dollars a year.
Mr Symond suggested matching your lifestyle spending - such as a restaurant meals - with extra injections into the home loan.
"A lot of people think, 'What's $50 going to do?'," he said.
"But do it twice a month and you have knocked more than $1000 off your home loan.
"There's no new secret. It's not like technology. There's no miracle."
Mr Symond said making some home loan tweaks could turn a 25 year mortgage into a 15 year mortgage.
DIVIDE AND SAVE
Divide your monthly mortgage repayment in two and pay that fortnightly.
"It means you end up paying one full extra month per year," Mr Symond said.
PAY WAGES DIRECTLY INTO YOUR MORTGAGE
Using either an offset account or redraw facility, borrowers have every dollar working against their home loan principal until it's needed.
"That way they are getting the full lending rate as interest on their salary," Mr Symond said.
BE SMART WITH DEBT
Mr Symond said most people had credit cards, car loans or other personal debts charging higher interest than their mortgage.
Switching that debt into a low-interest mortgage can slash interest "but you have to be disciplined", he said.
"I recommend that they set up a split loan within their existing loan, and transfer the debt to the home loan but with strict criteria.
"Don't just drop it into the home loan and turn the car loan of five years into a 30-year home loan and pay three times more interest.
"Set it up to continue making the full regular monthly payment that they were paying - instead of paying 10 or 12 per cent they are paying 3 to 4 per cent."
This delivers a double benefit of paying off personal loans faster and building a habit of paying more off the home loan to wipe it out faster, too.
AVOID INTEREST-ONLY MORTGAGES
"I have always been against interest only loans for owner occupiers," Mr Symond said.
In many cases it might only cost a few hundred dollars a month more to be paying off principal too, because principal and interest loans have lower interest rates.
"Pay back your home loan in the shortest possible time because you never know what's around the corner," Mr Symond said.
TIPS FOR INVESTORS: Ride the risky rate rollercoaster
Investors are being warned to be careful where they tread as record-low interest rates deliver mixed returns on their money.
The sharemarket is flirting with fresh record highs and property prices are climbing in some cities, but cash deposits and fixed interest investments are struggling to match inflation.
People need to be realistic about income expectations and avoid dangerous financial products that have been dressed up as safe places to park money.
William Buck's wealth advisory director, Adrian Frinsdorf, said the aim should be to "generate a regular and consistent portfolio return rather than a volatile one full of broken promises".
He said investors chasing higher returns were being targeted by promoters of higher-risk products such as unrated bonds.
"We're seeing more structured products, high yield bonds and derivatives offering returns of 5 per cent and above," Mr Frinsdorf said.
"If the investment has no growth potential, the risk is not worth it.
"There will always be an element of risk in investing - you just need to be rewarded for it. Risking 100 per cent for a maximum return of 5 per cent just doesn't make sense."
Mr Frinsdorf said Australian shares have had a good year but companies were struggling to lift profits in the weak economic climate.
"Yet when the alternative is 1 per cent in the bank account, equities still appear attractive, and buying quality shares on the dips remains a prudent long-term strategy," he said.
"Having a blend of international managed funds can also help spread risk and boost exposure to a wider range of markets."
Certified financial planner Peter Foley said low rates led to investors piling into high-dividend paying stocks such as banks, but this was risky.
"Banks will find it hard to pay the same dividends when their profit margins are lower," he said.
Mr Foley said today's investors needed a longer time frame.
"You want at least five years, but preferably seven or more," he said.
"This allows you to ride out the market ups and downs that inevitably happen in the short term."
Mr Foley said anyone feeling out of their depth should ask for help.
"I see too many people who have made panicked decisions that only make things worse," he said.
"Whatever asset class you invest in, you're sure to have your ups and downs. It's important to remind yourself at those times that you must be disciplined with your approach."
Real estate investors are enjoying some financial sunshine as low interest rates lower their costs while rents rise or remain the same.
Mr Frinsdorf said positive gearing - where rental income was higher than holding costs - was emerging in several markets.
But property investment was not simple, he said. "A number of factors beyond rates need to be considered from rental demand to subdivision profit margins."
TIPS FOR HOMEOWNERS: When to fix a loan
TO FIX or not to fix? Home loan rates are continuing to tumble, putting borrowers in the box seat to slash their debt at a quicker pace than ever before.
It's been a triple treat for mortgage customers this year as they lapped up three cash rate cuts in June, September and October.
Experts are predicting there are possibly another one or two more cuts to come.
This means borrowers need to carefully weigh up if it's time to bite the bullet and lock in their home loan rate.
1. BEST INTEREST RATES
There's only a small gap between the cheapest variable and fixed rate loan deals. Many lenders are offering rates under the 3 per cent mark on both loan options.
Data from financial comparison website RateCity found, for owner-occupier principal and interest loans, the cheapest three-year fixed rate was offered by Reduce Home Loans at just 2.69 per cent. Reduce also had the lowest variable rate deal at just 2.74 per cent.
RateCity spokeswoman Sally Tindall said, before making any decision, "find out what rates are available for both" types of loans.
And with the RBA cash rate sitting at just 0.75 per cent, there remains only room for three more cash rate cuts before hitting zero.
"The floor is in sight," Ms Tindall. "Before fixing, think about how much further fixed rates might fall to get to the bottom of the cycle."
RateCity's data found, when comparing variable and fixed loans, on average fixed rates were just 0.19 per cent lower.
2. PASSING ON CUTS
Regardless of whether or not there are more cash rate cuts to come, the question remains whether the banks would pass on more cuts to their borrowers.
The big four banks have remained under intense scrutiny for failing to pass on the cuts in full. The National Australia Bank, Westpac, Commonwealth Bank and ANZ only passed on between 0.55 and 0.59 percentage points of the 0.75 per cent of cuts this year, frustrating many borrowers.
RateCity predicts if there is another cut the banks will only pass on an estimated 0.14 percentage point drop to loan deals and, if there are two rate cuts, they will only pass on a 0.28 percentage point discount.
3. WHAT BORROWERS ARE DOING
Latest data from the Australian Bureau of Statistics found of all new owner-occupier mortgages in August this year, only 11.9 per cent of borrowers locked in their mortgage rate.
Compare this with the Global Financial Crisis: in August 2008 a massive 25.5 per cent of borrowers locked in loan rates.
Online mortgage broker Uno Home Loans' chief executive officer, Anthony Justice, said its data showed in September this year only 9 per cent of borrowers opted for fixed-rate loans compared with 13 per cent in September 2018.
"When you do get to the bottom, fixed is pretty good because when rates start going up you are already locked in,"
he said. "We would always say for people, if they want certainty with what their repayments will be over the one, two, three, four or five-year period, then fixed is definitely worth considering."
RateCity found people who fixed three years ago would now be better off.
If a borrower locked in a $300,000 30-year loan at the average rate of 4.02 per cent they would have paid about $35,240 in interest charges.
This compares to staying on the average variable loan, where they would have paid $39,770 in interest charges. They would have saved themselves $4530 in interest charges.
4. SPLITTING A LOAN
For those wanting to hedge their bets, having a portion fixed and a portion variable could be the best way to go.
HSBC head of distribution Alice Del Vecchio said it had "a lot of customers who choose to do a bit of a combination".
"Nobody is very good at determining rate movements so it gives you the best of both worlds," she said.
"You can fix a portion and have certainty and security over exactly what the repayment is for a portion, but if you do think rates will move downwards you've got a variable component that allows you to put in a lot more money if you wanted and redraw out as needed."
Customers could split any portion of their loan, for example, going 50-50 or perhaps opting for 70 per cent fixed and 30 per cent variable.
Fixed rate loans give borrowers plenty of certainty but they do come with restraints.
This includes limiting how much extra a customer can repay on their loan during the locked period.
Hefty break fees do apply if the borrower decides to exit the loan before the end date, so for those looking to sell their property or refinance their loan, experts say it's best to steer clear of fixing.
Ms Del Vecchio said customers needed to find out exactly what restrictions applied to the loan they were looking to take out.
"Different lenders have different features and different products - you have to be well aware of what's involved," Ms Del Vecchio said.
"Just because it's fixed it doesn't mean it's not flexible.
"You've got to look in the detail and really compare products."
Fixed rate loans often don't come with mortgage offset accounts, which are products that allow customers to reduce their overall interest charges by keeping cash in their day-to-day account linked to their mortgage.
A script for rate cut success
BEFORE making the switch to a new bank it's worth phoning up your existing lender to see if you can score yourself a better deal.
And if your financial institution comes to the party it often means getting a discount without having to fill out a scrap of paperwork.
But before picking up the phone to talk tough, customers should always be armed with information.
This includes specifics about cheaper deals offered by rival lenders.
Lenders ultimately want to work out whether you are serious or not about switching, so it's critical to be able to reel off some better deals offered by other financial institutions.
This puts pressure on your bank to do something to keep you happy.
It could include reducing your home loan rates, waiving annual fees or shifting you to a deal that betters suits you.
So here's a simple script to help you get an on-the-spot rate discount.
BANK: Hello, how may we help you today?
YOU: I want to switch banks, would you put me through to the mortgage retention team please?
BANK: Sure, no problems.
YOU: Hi, I'm looking to switch banks to get a better deal. I am paying a mortgage interest rate of 3.5 per cent, but other lenders are offering less than 3 per cent.
BANK: Can you explain some of the better deals you are seeing out there?
YOU: Yes. Bank [INSERT NAME] is offering a variable rate loan with a rate of 2.99 per cent and another bank [INSERT NAME] is offering rates from 3.05 per cent. Can you match these deals?
BANK: We are looking at your account and you do not appear to have reviewed your loan in 12 months. Would you consider staying with us if we could give you a better deal?
YOU: Yes, but I want a discount on my rate as soon as possible. My interest rate is too high.
BANK: Hold on for a moment and we will see what we can do.
BANK: We have some good news, we aren't able to match the rate of those other lenders but we can reduce your rate to 3.2 per cent, effective within three to five working days. How does that sound?
YOU: Yes, that sounds great. I am happy to stay. Please send me through an email or a written letter notifying me of the change. Thank you.