RBA Governor Phillip Lowe is encouraging borrowers to consider refinancing as borrowers with an outstanding loan may be being taxed for their loyalty to their lender.
The RBA’s quarterly statement on Monetary Policy released this month revealed that existing borrowers are paying higher interest rates than new borrowers.
“If you took out a loan a while ago, it is worth shopping around and checking in with your lender to see if it can now give you a bigger discount,” said Phillip Lowe in his statement.
In December 2019, borrowers paid 3.28% in interest for new loans in comparison to borrowers with an outstanding loan who paid 3.61%.
The RBA’s data suggests that for a loan balance of $250,000 these borrowers may be paying an extra $1000 in interest payments a year.
The RBA has said that a key reason for this is that lenders are giving borrowers lower rates than advertised.
“Discounts offered to lenders standard variable rates have risen over recent years and these discounts tend to be fixed for life,” said Lowe.
“What might have seemed like a big discount then might not be so big now,” he said.
The RBA has stated that the reason for this is that lenders wish to remain competitive without having to adjust their rates for existing customers.
Renegotiating for a better discount
In their statement, the RBA has said that it is rare that borrowers will pay interest rates as high as the standard variable rates.
“Lenders advertise a range of interest rates that are materially lower than their standard variable rates, in addition most individual borrowers are offered or may be able to negotiate further discounts,” the RBA mentioned.
The major banks packaged mortgage interest rates for owner-occupier loans currently attract a discount of around 50-100 basis points to standard variable rates.
The average discount in relation to standard variable rates offered by major banks has increased from 100 basis points in 2015 to 150 basis points in 2019.
Despite this, a recent survey by Lendi revealed that only 47% of Australians were aware of their right to negotiate for a better variable rate with their lender.
“Your bank is infinitely more likely to give you a discount if you put the heat on them and demand a better deal,” Uno Chief Executive Anthony Justice told Domain.
“If you’re uncomfortable asking for a discount, consider having your broker ask on your behalf, or go in prepared for the conversation by looking at what competitors are offering,” Justice said to Domain.
The RBA has said that the ability of well-informed borrowers to renegotiate their loan is a key reason why borrowers with new loans are paying less.
Refinancing your loan
The RBA has acknowledged that another reason is that some borrowers are refinancing away from interest-only loans.
For instance, over $50 billion of interest-only loans were changed to principal and interest loans in the first half of 2019.
The lower interest rates on principal and interest loans have made this type of loan particularly attractive to borrowers looking to refinance.
In December 2019, borrowers with a variable principal and interest loan on an owner occupied property paid 3.60% in interest according to the RBA.
Whereas, those with an interest only loan on an owner-occupied property paid 4.12% in interest.
For instance, the variable rate for owner-occupiers who had a principal and interest loan was cut by 20 basis points by ANZ.
Similarly, Westpac’s fixed rates for principal and interest as well as interest-only loans decreased as well.
While the downside is that borrowers may have to pay more upfront with a principal and Interest loan, they may be able to save thousands in the long term.
According to ANZ, a borrower with an Interest-only loan amounting to $500,000 may have to pay an additional $49,356 over 30 years if the interest rate was 5.55% p.a for interest-only loans and 5.00% p.a. for principal and interest Loans.
Other refinancing options
While switching to a different type of loan is becoming a common form of refinancing, some experts are suggesting that borrowers could consider refinancing their savings as well.
The rate of cuts to term deposit interest rates has been double the rate of the increases seen in the same period according to Canstar.
This is affirmed by the fact that that the term deposit rates decreased by approximately 100 basis points across the major banks in 2019, according to the RBA.
In their statement at the release of their quarterly monetary policy this month, the RBA acknowledged that term deposits had seen the greatest decline when looking at savings rates.
This has meant that those who have placed their savings in a term deposit are enjoying less returns for the money they put in.
Interest rates expert Peter Marshall suggested to Mozo that Phillip Lowe’s recommendation to “shop around” is also applicable when looking at savings accounts.
“While the outlook may appear bleak, there are still a handful of providers around, that offer savers competitive rates that are well above the big four,” Marshall said.
“Neobanks like Xinja and Volt offering competitive ‘no strings attached’ rates that start from 2.25%, so it might be worth considering different product options,” he said.
If a term deposit does not appeal to you, there are many other options that you can consider as well such as opening up a high-yield savings account.
Whatever you choose, the key takeaway from the RBA’s quarterly statement on monetary policy is that those who refinance or renegotiate for a better deal could achieve better interest savings.
Words by Vidya Kathirgamalingam
- RBA Opening Statement to the House of Representatives Standing Committee on Economics 7 February 2020
- RBA Statement on Monetary Policy February 2020
- Better safe than sorry: Is now the time to lock in a top-notch term deposit?
- Term deposit rates dwindle as bank funding costs fall
- Understanding principal and interest and interest only repayments
- ‘If you don’t ask you don’t get’: How to demand a better deal on your home loan
- Lendi Borrower Confidence Report January 2020
- Lenders changing loyalty, confirms RBA
- Mortgage loyalty tax could be costing you an extra $1000 a year, says RBA
- Home loan rate wars: Banks cut interest rates “early” as competition “heats up”
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