A property buyer with a $1 million loan can cut annual repayments by about $1500 a month – or nearly $18,000 a year – by switching to one of dozens of cheap standard variable rates, analysis of mortgage rates reveals.
That’s around $540,000 in savings over a 30-year mortgage, or enough to buy a modest beach house, pay private secondary school fees for two children or retire a few years earlier then planned.
Lenders wanting to attract new borrowers – or get those with competitors to switch – are also offering lucrative cash incentives, fee reductions, discounted interest rates, gift vouchers and rewards points.
But there are many small print conditions borrowers need to be aware of before committing.
For example, many are available only for first-time borrowers, rewards are paid over several years rather than upfront, or the product packages have annual fees.
Savvy borrowers also need to scrutinise the small print to make sure the offers do not distract them from the underlying fundamentals – interest rate, ongoing fees and additional loan features such as offset accounts.
For example, Citi’s headline standard variable rate for borrowers with 20 per cent deposit is 5.93 per cent, or 249 basis points higher than the lowest of 3.44 per cent, on offer from Freedom Home Loans for loans of more than $500,000 with a minimum 20 per cent deposit.
Shadow bank deals
Lenders want to do deals because mortgages are their most profitable product and more sales contribute to bigger revenues, higher executive bonuses and increased shareholder returns.
Thousands of loans were analysed by research house Canstar, which monitors prices and fees, to find the best deals and prices for a $1 million borrower seeking a standard variable principal and interest loan for 30 years.
The accompanying table shows that shadow banks comfortably outprice major banks and other lenders, such as credit unions, mutuals and their smaller bank rivals, across all loan categories.
They are also two-and-a-half times more likely to approve a loan than a major, according to recent analysis commissioned byThe Australian Financial Review, and are growing at two-and-a-half-times their rivals but still only account for about 9.5 per cent of the mortgage market.
Shadow banks do not offer deposit accounts so are not classified as authorised deposit taking institutions (ADIs) by the Australian Prudential Regulation Authority.
They are required to follow the Consumer Credit Code, which covers credit transactions, and are also regulated by the Australian Securities and Investments Commission to ensure transparency of fees and rates.
APRA also oversees their regulation but not as rigorously as for the deposit-taking institutions. It is not clear how much looser the regulatory standards are for non-banks than for ADIs, which could add to risk, according to market analysts.
What’s on offer
Top deals include:
- ANZ is offering a conveyancing fee rebate of up to $1000 for first-time buyers with home loans over $250,000.
- Bank of Melbourne has $2000 refinancing cash back or $1500 when buying a property. It is available for new owner-occupied or investment loans with the Advantage Package that has a $395 annual fee and is available for minimum loans of $250,000.
- First Option Credit Union is offering $1000 off loan set-up costs. Only available for first-time borrowers and conditional upon loan settlement.
- Suncorp is offering $1500 cash for loan refinancing. Available for minimum $250,000 owner-occupied loans in Home Package Plus or Back to Basics. Package has a $375 fee that in some cases will be waived for the first year.
- Macquarie Bank’s 250,000 Qantas frequent flyer points are spread out across the term of the loan: 80,000 on loan approval; 1000 for every month of the loan; and 25,000 on the third and fifth anniversaries of the loan.
- Westpac offers 500,000 Velocity points for home loans of at least $1 million. There are 200,000 for minimum home loans of $250,000. Applicants must take out a Premier Advantage Package that has annual fees of $395.
Much tougher lending conditions and a weaker property marketmeans lenders they are competing for fewer borrowers, which results in better deals for qualifying borrowers, particularly those with a 20 per cent deposit and regular income that comfortably meets current and expected outgoings.
Regulation-lite shadow banks are also aggressively pricing their loans and targeting borrowers who might not qualify for a loan – or refinance – with the majors. Unlike authorised deposit taking institutions, shadow banks do not take deposits and raise money on wholesale markets.
Falling property prices and tougher lending conditions are not discouraging large numbers of first-time buyers from returning to the market after years of being outgunned by cashed-up rivals.
There are also an estimated 900,000 borrowers expected torefinance about $300 billion worth of fixed-rate interest-onlyloans as their terms expire over the next two years.
New interest-only loans have shrunk by about two-thirds in the past three years from about 60 per cent to less than 20 per cent of all new loans, according to Australian Finance Group, one of the nation’s largest mortgage brokers.
Record levels of household debt, rising land taxes and low wages growth are also forcing many existing property buyers to review their financing and consider cheaper rates.
Martin North, principal of Digital Finance Economics, says many borrowers living in expensive houses in leafy inner suburbs are feeling the pressure as much as those living in new estates on suburban fringes.
“Sure they have bigger incomes but they also have bigger mortgages and bigger rising costs, such as school fees,” he says.