Are you paying too much on your home loan?

The RBA has been cutting rates, and so have the banks. But which ones are offering the best deals? If yours isn’t on this list, it might be time to shop around.

As rates come down, it’s a good time to have another look at mortgage rates in the market. Picture: iStock

Interest rates are coming down but some borrowers are still getting stung on their home loan repayments.

Making one simple change could save tens of thousands of dollars, and that’s even before making extra repayments or throwing money into an offset account.

The average owner-occupier variable home loan rate is now at 5.8 per cent, comparison group Canstar estimates. So if you’re on that rate or above, and especially if you’re in the early years of a 30-year mortgage, it might be time to shop around for a better deal.

To give you an idea of what you could be paying, the lowest variable offering currently in the market is 5.34 per cent. For first home buyers it’s even lower at 5.24 per cent.

Who’s offering the best rates?

Smaller banks and non-bank lenders are offering the most competitive rates. Non-bank lender Pacific Mortgage Group is leading the pack with its 5.34 per cent variable loan but there are plenty of others sitting just slightly higher, per the table below. Again, keep in mind that Horizon’s offering is only for first-home buyers.

All up, eight lenders are currently offering rates of 5.39 per cent, including People’s Choice, RACQ Bank and Australian Mutual, while a handful more have rates as low as 5.44 per cent.

All up, 34 lenders now offer at least one variable rate under 5.5 per cent, according to Sally Tindall, head of research at Canstar.

“If your rate’s above 5.8 per cent, alarm bells should be ringing. That’s just the average, it’s not even competitive,” she says.

If you’re keen to stick with the big four banks, CBA, Westpac and ANZ are currently offering variable rates of 5.59 per cent, while NAB is the outlier at 5.94 per cent. These are the advertised rates but there’s often wriggle room for the bank to do a better deal if, for example, your loan-to-value ratio is particularly low.

For those looking at fixed rates, there’s a handful offering just under 5 per cent. But the cash rate is widely expected to fall further in the near term, meaning variable rates will continue to drop.

Refinancing options

Do-it-yourself refinancing, that’s dealing with the bank yourself rather than through a broker, can be a bit of a pain and time consuming but it can also pay off. Your broker isn’t always going to tell you the absolute lowest rates on the market, only the ones they can get for you.

But if you’ve got a broker who can get you a competitive rate, it means they do all the legwork and you don’t have to spend hours calling up each lender to get the best deal. Keep in mind, broker or not, switching lenders comes with fresh credit checks and invasive financial questions, as well as refinance fees that can range from $500 to $2000.

There’s also the risk that you refinance and the Reserve Bank cuts rates but your new lender doesn’t pass the cuts on. We may not see this in the current cycle, especially since Treasurer Jim Chalmers was straight onto the banks in February ordering them to pass the RBA cut on, but it’s a risk to be aware of.

If you can’t get a lender to give you a rate near the lowest in the market (5.34 per cent), getting it down from say, 6 to 5.5 per cent, will still mean a big saving. But there are traps to watch for, including the impact of stretching out your loan term back to 30 years.

Crunching the numbers for The Australian, Canstar has come up with a couple of scenarios that illustrate the point.

A borrower with a $600,000 home loan and 25 years left on their mortgage who refinances to 5.5 per cent and keeps their current loan term will potentially save almost $52,000 in interest. But if that same borrower extended the loan term back out from 25 to 30 years, their monthly repayments would drop by $459 but over the life of the loan they’d actually end up paying $55,000 more than if they’d done nothing at all.

Canstar’s scenario assumes there’s two more RBA rate cuts (which we expect this year), bringing the cash rate to a neutral 3.35 per cent. It also assumes the banks pass on these cuts.

No frills, digital only

Other offerings in the market to look at are the no-frills, digital-only products like CBA’s digi home loan and digital bank Up, which is backed by Bendigo Bank.

CBA’s digi home loan rate for owner-occupiers is at 5.59 per cent while its offering for investors is a competitive 5.69 per cent. Unloan, another digital-only offering backed by CBA is even lower, at 5.49 per cent.

Like other lenders, CBA has seen a pick-up in customers looking to refinance since the RBA kicked off its rate-cutting cycle in February, according to its executive general manager for home buying, Michael Baumann.

“It’s a good trigger for customers to look at the interest rate they’re paying and figure out whether they’re on a good deal,” Baumann says.

The bank has seen a doubling of digital applications on its home loan products in the past year.

And in a sign of an increasingly competitive market, CBA recently slashed its rates more than the RBA’s 0.25 per cent May rate cut. Over the past six weeks the rate for owner occupiers has come down 31 basis points, while for investors it’s down 43 basis points.

With market watchers tipping two more RBA rate cuts in the next few months, if you get your lender down to a rate of 5.49 or less before the next cut you could be looking at a rate that starts with a 4 within a few months.

Originally published as Are you paying too much on your home loan?