Why it’s worth cutting mortgage costs via cheaper loan

Amy Mylius says monthly costs on investment loans for her town house and apartment rose by $1300 a month before refinancing.
Amy Mylius has saved more than $1000 a month in loan costs on her two investment properties by switching to a new lender after her repayments crept up by more than 100 basis points in 12 months.

Mylius, from the inner Melbourne suburb of Fitzroy, watched her rates slowing rising to more than 5 per cent as ANZ discreetly pushed up costs for interest-only investors in response to rising funding and compliance costs, despite record low cash rates.

She says when monthly costs on investment loans for her town house and apartment rose by $1300 a month she decided to refinance.

Mylius, who is also paying off her home, says: “The lending environment is changing so quickly. You need to watch rate movements and shop around for the best deal. I review my rates every six months.”

The big four banks, which account for about 70 per cent of loans, have increased their rates on average for interest-only investors by 54 basis points during the past 18 months since regulators imposed caps on lending to cool over-heating markets, says research house and comparison site Canstar. Other lenders have increased rates by between 20 and 27 basis points, its analysis shows.

Lenders are also increasing fees or raising rates for existing borrowers to subsidise new borrower’s cheaper rates.
Mortgage providers are under intense pressure from regulators and the banking royal commission to ensure borrowers have adequate income to comfortably afford repayments for the term of the loan.

That means they are demanding more details about borrowers’ income and spending, with banks like Westpac more than doubling the detailed categories of questioning from six to 13.

Some lenders, particularly relying on overseas funding to finance their loans, face increased borrowing costs thanks to higher US interest rates.

The big four banks, which account for about 70 per cent of loans, have increased their rates on average for …
The big four banks, which account for about 70 per cent of loans, have increased their rates on average for interest-only investors by 54 basis points during the past 18 months.
Funding pressures
The short-term money market benchmark interest rate, or Bank Bill Swap Rate, has been rising sharply since January, increasing funding pressures despite the Reserve Bank of Australia maintaining cash rates at 1.5 per cent.

For example, ME Bank, owned by 29 industry super funds, recently raised rates for existing property borrowers by up to 16 basis points in response to rising funding and compliance costs.

MyState Bank, the listed finance group, has introduced a $300 establishment fee for its basic variable residential investment loan.

Lenders are also increasing fees or raising rates for existing borrowers to subsidise new borrower’s cheaper rates.
Lenders are also increasing fees or raising rates for existing borrowers to subsidise new borrower’s cheaper rates.
According to comparison site Mozo, effective rates have increased for more than 40 per cent of borrowers in the past 20 months as lenders raise rates or borrowers fail to switch to cheaper alternatives.

Many borrowers are paying rates above 4 per cent despite benchmark principal and interest rates being under 3.7 per cent, its analysis shows.

Kirsty Lamont, Mozo director, says lenders are offering their best deals for buyers with big deposits and steady incomes and relying on the inertia of existing borrowers not to compare rates and switch.

Westpac Group, which includes St George Bank, Bank of Melbourne and BankSA, is launching a limited offer 3.68 per cent loan for first-time, owner-occupier homebuyers with principal and interest repayments.

Lenders are demanding more details about borrowers’ income and spending.
Lenders are demanding more details about borrowers’ income and spending. Dominic Lorrimer
Throttling back
But lenders are “throttling back” on many borrowers seeking refinancing who don’t meet their tough new income standards, or whose rising household expenses might make it more difficult to keep up with repayments.

Martin North, principal of Digital Finance Analytics, says the number of troubled households seeking to refinance has more than doubled from 15 per cent to more than 30 per cent in the past 12 months.

There are estimated to be 550,000 households seeking to refinance over the next three years as fixed loan terms expire or borrowers seek better terms and conditions, DFA’s analysis shows.

Martin North, principal of Digital Finance Analytics, says the number of troubled households seeking to refinance has …
Martin North, principal of Digital Finance Analytics, says the number of troubled households seeking to refinance has more than doubled from 15 per cent to more than 30 per cent in the past 12 months.
The Reserve Bank of Australia is warning its next rate move will be up after keeping rates on hold for a record 21 months in a row.

But Shane Oliver, head of investment strategy with AMP Capital, does not expect any increase until 2020, adding “the next move being a cut cannot be ruled out”.

The possibility of a rate cut is being raised because house prices are slowing with more weakness likely, tighter lending standards are easing nascent inflationary pressure and growth is likely to remain below RBA expectations.

But investors like Mylius, a buyers’ agent with Cate Bakos Property, says unofficial rate increases make it imperative to review mortgage costs.

Mylius says variable rates on her two ANZ investment properties had “gradually” crept up from below 4 per cent to about 4.9 per cent on one and more than 5 per cent on the other.

“Last month I called my mortgage broker to find out my options,” she says.

She initially switched to an ANZ two-year fixed principal-and-interest loan at 3.88 per cent. This week she refinanced with CBA at 4.29 per cent on a three-year interest-only fixed rate. ANZ did not charge a fixed term break fee.

“The $1000 savings a month – because no principal is paid – will go into my offset account against my owner-occupier loan, which is more tax effective,” she says.