Consider yourself an ideal mortgage payer? If so, you might be able to escape the worst of the home loan squeeze as the Reserve Bank continues to break records with its interest rate hikes.
The major banks are in a cut-throat battle for good borrowers right now as their flow of first home buyers dries up and much of their loan books come under pressure from higher rates.
As they get more desperate, the home owners who have been meeting their repayments and have built up sizeable equity in their properties are an increasingly hot commodity.
Those who play their cards right could slash their mortgage rates and save thousands.
Australia’s largest home lender, Commonwealth Bank, is a case in point. In recent days it’s cut up to 2.03 percentage points from its packaged loans in a bid to attract new customers.
RateCity research director Sally Tindall told TND the move has seen CBA start advertising deals that were once shrouded in secrecy and only offered to select brokers or borrowers individually.
“They’ve removed the cloak of secrecy,” she said.
“It’s very unusual for a big bank to have a lower advertised rate for a home loan that comes with all the bells and whistles than on their basic loan.”
Other banks are expected to respond in coming weeks with their own deals; now is the time for good borrowers to consider refinancing with a new or existing lender, experts say.
But how do you know if you’re a sought after customer? And are these packaged deals worth it?
Wanted – ideal mortgage payers
It’s not often that a major bank cuts interest rates at a time when the RBA is hiking rates, so CBA’s latest move is a telling sign that the big four are scrambling to shore up their loan books.
Whether that’s an opportunity for you depends on a few factors. Banks are being increasingly picky with who gets a loan deal, but if you classify as an ideal borrower they are looking for you.
Mortgage broker Clint Howen, founder of NSW-based fintech Gunn, said banks are looking for customers with reliable jobs, particularly couples with a dual income. That’s because regulators want banks to balance their loan books with borrowers who can easily weather tougher times.
“If you’ve got a solid income you can really shop around and get a good deal,” Mr Howen said.
In particular, banks are looking for people who have plenty of space in their budgets to afford rising mortgage costs over the coming months.
It also helps if you own a significant portion of your property already – those with loan to value ratios of 70 per cent or less are best off, Orium Finance director Luke Heavy said.
“You would have extra capacity from a borrowing perspective so you’re not stretching yourself to the limits,” he said.
“That way when they run you through their serviceability calculator you’ll have a lot of spare capacity to meet repayments.”
Deals unpacked
The specific deals CBA has targeted with its latest cuts are packaged loans, those with extras like offset accounts that come with annual fees.
Ms Tindall said these offers usually come with higher rates too, but that after the recent cuts many of CBA’s offset account packages now have a lower rate than those without.
“There’s this amazing opportunity for existing customers to pick up the phone and say to their bank, ‘hang on, look at these rates, mine is nowhere near that, why can’t I get that rate’.
“[And] 4.57 per cent in the current environment is pretty good from Australia’s biggest bank.”
But before you pick up the phone to start the process of refinancing, you need to consider if an offset account is going to be worth it for you, given annual fees of around $400 every year.
Mr Heavy said offset accounts can be particularly valuable for home owners because money stored in them is counted against the principal of a loan, reducing interest owed to the bank.
“Offset accounts can be quite powerful, it allows you to store surplus cash which has the impact of helping you pay off your loan while that money is there,” he said.
Mr Howen cautioned that customers often need to store significant amounts of money in their offset account to make them worth the annual fees banks charge for access to them.
“You have to use it, and not everyone can,” he said. “For them to work you need to park normally around $10,000 for it to start paying for itself.”
However, with CBA currently offering lower rates on some of its packaged deals than its no frills options, Ms Tindall said borrowers with decent sized loans should focus on their interest rate.
