By Ian Creighton – Mortgage Broker at Long Property
On Tuesday the RBA lifted the official cash rate by a further 25 basis points, bringing the official cash rate to 2.6% – a cumulative rise of 2.5% since May. Experts are predicting further rate rises in the months ahead; economists at CBA predict a peak cash rate of 2.85% while Westpac and ANZ predict a far higher peak of 3.6% – a full 1.0% higher than today’s rates.
There is no way of knowing who will be correct, but it is prudent to ensure you are currently on the best rate the banks will offer. Banks generally reserve their best rates for new borrowers or those who continually seek updated pricing. Our analysis shows that if you have been with your current lender for one year you will be paying around 0.5% more than a new borrower, and if you have been with your lender for more than 2 years, you are typically paying 1.0% more.
Lenders though are vying for business with large discounts being offered for borrowers in a strong equity position or for borrowers with a lower level of debt compared to their income.
Many banks are now offering larger discounts to borrowers whose debt to income ratio is below 6. This means that if you divide your total debt by your total income and the number is lower than 6 (working below), then it is highly likely that the bank will be able to offer you a further 5-10 basis points off their advertised rate.
| Income | Debt | ||
| App 1 Salary | $ 100,000 | Home loan | $ 800,000 |
| App 2 Salary | $ 100,000 | Car loan | $ 20,000 |
| Credit Cards | $ 10,000 | ||
| Total Income | $ 200,000 | Total Debt | $ 830,000 |
| Debt to income | 4.15 | ||
Lenders are also offering competitive pricing for borrowers with a lot of equity in their home. People can build up equity in one of two ways. The first way is by reducing debt – although this can be a long, slow process especially in the early days of a mortgage when much of the repayments are going towards the interest portion rather than reducing the principal each month. The second way is if the property has increased in value since purchase.
If you purchased your home more than two years ago, there is a good chance that despite the recent market slowdown, you will have gained significant equity in your property. For example if you purchased your home for $1 million and borrowed $800,000, then your loan to value ratio (LVR) would be 80.0%. Let’s assume the property has now risen to $1.2m and you have paid off zero debt; due to the uplift in property value, your loan to value ratio is now c67.0%. Going from an 80.0% LVR to below 70.0%, most lenders will offer a further 5-10 basis points discount.
| Loan | $800,000.00 | Purchase price | $1,000,000 |
| Loan to Value Ratio | 80.0% | ||
| Loan | $ 800,000.00 | Current Value | $ 1,200,000 |
| Loan to Value Ratio | 67.0% |
Finally, banks are competing fiercely by offering cashback incentives for refinancing. Many are currently offering $4,000 – the typical cost to refinance is c$600-$700 so from day one, you are up by $3,300. For many this may equate to a full month’s loan repayment.
In summary, despite rising interest rates, borrowers can still take advantage of some of the most aggressive discounting we have seen as well as some extremely generous cashback offers. It pays to be proactive and lock in discounts prior to further rate increases.
To discuss any of the above further or to make sure you are on the best rates you can book time for a meeting here – www.calendly.com/ianlongproperty
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This article provides general information only and has been prepared without taking into account your objectives, financial situation or needs. We recommend that you consider whether it is appropriate for your circumstances and your full financial situation will need to be reviewed prior to acceptance of any offer or product. Nothing here constitutes legal, tax or financial advice and you should always seek professional advice in relation to your individual circumstances
