Interest rates in Australia have reached a historical unprecedented all-time low and the benefit of lower interest repayments is flowing through to new borrowers and first-home buyers!
Is the benefit also flowing through to homeowners with existing mortgages?
Assuming that like me, your loan has been in place for a number of years, then you may be interested to know that new data released by the Reserve Bank of Australia, indicates that this is not the case.
Data published by the Reserve Bank shows that if your home loan is more than four years old, the rate you are paying is 40 basis points higher than new loans offered to new borrowers in the market today! This means that if you have an existing $250,000 loan in place, you could be paying $1,000 more per year in interest.
The chart to the right, published by the RBA, shows the likely scenario for your home loan depending on how much time has passed since you took out the loan and how this gap has changed over time. For example, if your loan was established more than 8 years ago, then you could be paying 60 basis points more than new loans on the market today. This translates to paying $3,000 more per year on a loan of $500,000 or potentially $30,000 more if the gap in the rate is maintained.
Our own experience with refinancing clients at Brisbane Home Loans has been somewhat higher than the average figures provided by the RBA in this chart. Typical refinancing clients in the latter part of 2019 achieved averaged rate improvements ranging from 40 basis points to as much as 150 basis points or 1.5% reduction. Considering a loan of $500,000, a 1% reduction can potential save $5,000 per year in interest repayments.
The Reserve Bank is of the view that banks have shifted from lending to riskier interest only loans in the past, to safer lower-rate principal and interest loans during the last couple of years. This shift has resulted in intensified competition in the lending market and lower rates for new borrowers and of course first home buyers.
The Reserve Bank also noted that gap between the standard variable mortgage rate (this is the rate the lender publishes for their variable rate), versus the actual discounted rate that the lender will offer to new borrowers can be as much as 200 basis points, or 2% lower. Comparing to 2015 figures, the discounted rate was just 105 basis points lower than the standard variable mortgage rate. Other words, lenders today are offering discounted rates to new borrowers 1% less than the gap that existed in 2015.
These numbers reflects the intense competition in the market which is providing a benefit to new borrowers and first home buyers but not long standing lenders.