The lowest home loan rates come with a catch

Home loan customers rejoice - there’s a new lowest variable home loan rate on the RateCity database, but it comes with a catch.

Challenger lender, Reduce Home Loans, is offering an historic low variable rate of 2.25 per cent for owner-occupiers. However, new customers will need a maximum LVR of 60 per cent to qualify.

• Loan to Value Ratio (LVR) is a measurement of how much you’re borrowing in a home loan, compared to the value of the property itself. For example, if a property is worth $500,000 and you’ve saved a deposit of $100,000, you’ll need to borrow 80 per cent of the property’s value ($400,000). This would make your LVR 80 per cent.

Competition may be heating up in the home loan market, as this new loan and rock-bottom rate comes after Westpac announced on Friday it was cutting its basic variable rate to 2.69 per cent.

This cut makes Westpac’s rate the lowest variable home loan rate offered by a big four bank – but only customers with LVRs of 70 per cent can qualify.

In fact, RateCity research has found that the 3 lowest owner-occupier, variable home loan rates on its database all require a maximum LVR of 60 per cent.

Low rates for big deposits

RateCity figures show that of the top 5 lowest variable home loan rates on its database, only one has a maximum LVR above 70 per cent.

Lowest variable home loans

Source: RateCity.com.au. Notes: figures based on $350,000 variable, owner-occupier home loan paying principal and interest.

This means that for would-be-buyers, to qualify for the most competitive loans you will need a deposit of at least 40 per cent. For homeowners looking to refinance, you will need to have at least 40 per cent equity in your property.

This is not an unusual requirement for lenders, as the greater the size of your deposit, or the more equity in your property, the less risky you are seen as a borrower and less likely you’ll have to pay for Lenders Mortgage Insurance.

• The LVR is also used to calculate whether or not you will need to pay for Lender’s Mortgage Insurance (LMI). This is a type of insurance policy that can cost tens of thousands of dollars and protects your lender if you default on the loan. Typically, if a home loan has an LVR higher than 80 per cent (deposit less than 20 per cent) you will need to pay this insurance as you are seen as a riskier borrower.

According to the Sydney Morning Herald, last year some of Australia’s biggest banks advised brokers they would moving towards “LVR pricing”, meaning they would be offering percentage point discounts to interest rates on home loans with lower LVRs.

Australian home loan lenders are trying to bring lower-risk customers onto their books by offering them more competitive home loan rates. In an environment where regulatory bodies like the ACCC and ASIC are discouraging risky lending, it’s unsurprising that the lowest rates are being offered to the “safest” customers.

Could home loan rates fall below 2%?

Some borrowers may be wondering if Reduce Home Loan’s rock-bottom variable home loan rate of 2.25 per cent may be a sign that rates are headed even lower.

The answer may lie somewhere between the cash rate and how the big four banks compete.

The Reserve Bank of Australia (RBA) has kept the cash rate on hold at 0.25 per cent since March this year, with Governor Philip Lowe indicating that the RBA has no plans to cut to zero any time soon.

This means that we may be close to the bottom of the market for home loan rates. However, lenders may slash rates further as competition between the banks heats up.

RateCity research director, Sally Tindall, said the cuts from Westpac on Friday were designed to get “new business in the door.”

“Westpac Group’s home loan book has fallen month-on-month, according to the latest APRA statistics. They need new customers to keep moving in the right direction.”

Competition between the banks means we may see CommBank, NAB or ANZ follow suit. However, it’s more likely that challenger banks, similar to Reduce Home Loans, will be the ones putting out these lower rates to get new customers on the books.

These low rates are typically designed for new customers. If you’re not prepared to refinance you may want to consider haggling with your current lender for one of these lower rates.

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