Does an automatic home loan interest rate cut sound appealing?

Home loan customers can now automatically get a lower interest rate as they pay down their mortgage. That may incentivise customers to pay off their home sooner, but it could still pay for homeowners to check if there’s a better deal available.

Online-only home lender Athena launched dynamic pricing with its AcceleRates loan today, where customers’ interest rates are lowered as they pay off more of their home loan.

Athena notes it is the first lender in Australia to automatically drop interest rates in this way.

How does it work?

The AcceleRates loan’s variable interest rate is determined by the size of a customer’s home deposit, in that it has three price tiers based on their loan-to-value ratio (LVR) of 70%-80%, 60%-70% and less than 60%.

The rates get lower as a customer pays down their home loan to reach a new tier, as shown below with owner-occupier rates for those paying principal and interest:

• 70%-80% LVR: 2.54% (comparison rate 2.46%)
• 60%-70% LVR: 2.49% (comparison rate 2.43%)
• Less than 60% LVR: 2.39% (comparison rate 2.39%)

According to the lender, if customers started out at the 80% LVR tier and paid the minimum principal and interest repayments, they would hit the next 70% LVR tier in four years and two months. It would then take another three years and nine months for them to get to the lowest rate.

Athena CEO Nathan Walsh said the dynamic pricing would mean greater savings for its customers.

“On average we are saving customers who switch to us $60,000 over the life of their loan,” Mr Walsh said.

“With our new AcceleRates pricing model many of these customers will now save $70,000.”

Existing customers would receive the rate drop on 30 September, 2020, while new customers who applied from today would receive the new rates when they settle.

Athena said it promised existing customers across its home loan offerings would always be given the same rate as new customers on a like-for-like loan.

The lender also said it does not charge any ongoing, application, account or exit fees.

What are the pros and cons of automatic interest rate cuts?

Canstar finance expert Effie Zahos said automatic rate cuts could be convenient for some borrowers who may feel uncomfortable trying to negotiate a discount with their current lender.

Dynamic rates could also save borrowers some time and possibly money on refinancing to another bank, she noted.

“With rates changing so often and new record lows being introduced each week, it’s not always practical for consumers to keep doing all the hard work to refinance,” Ms Zahos said.

On the flip side, automatic discounts could make it less likely customers would check in on their home loans.

“Dynamic pricing may appeal to someone who doesn’t regularly review their home loan. That said, it’s important for those customers to review their home loan at least once per year to ensure you’re getting a good deal,” Ms Zahos said.

Ms Zahos also said whilst LVR-based pricing was not new in the market, other lenders assessed LVR at the point of application only and customers’ rates were not changed automatically as their loan was paid down.

Athena is the only provider at this stage to automatically drop customer rates as they enter the new LVR tier. It is worth noting that some lenders do offer loyalty discounts based on the number of years customers have been with them.

How does Athena’s offer compare to other home loan interest rates?

Ms Zahos said with the home loan market so competitive at the moment, it was prudent for borrowers to assume they could be getting a better deal.

She said Athena’s rates were competitive when compared to the rest of the market, but there were lower rates out there.

Our analysts crunched the numbers to determine how Athena’s interest rate drops on its AcceleRates product compared to other lenders’ rates at different LVRs.

The below average and minimum rates are according to Canstar’s database at the time of writing.

70%-80% LVR

The below rates apply to owner-occupiers paying principal and interest:

• Average: 3.43%
• Athena: 2.54% Liberate loan (comparison rate 2.46%)
• Lowest: 2.19% Reduce Home Loans’ Super Saver Variable loan (comparison rate 2.19%)

Investors in this LVR bracket who pay principal and interest are charged an average of 3.81% compared to Athena’s 2.94% (comparison rate 2.87%). Easy Street Financial Services has the lowest rate on Canstar’s database for investors in this tier at 2.59% (comparison rate 2.63%).

60%-70% LVR

The below rates apply to owner-occupiers paying principal and interest:

• Average: 3.41%
• Athena: 2.49% Evaporate loan (comparison rate 2.43%)
• Lowest: 2.17% Freedom Lend’s Freedom Variable P&I 70% loan (comparison rate 2.17%)

Investors with principal and interest repayments pay an average of 3.79% compared to Athena’s 2.89% (comparison rate 2.83%), and a minimum of 2.59% (comparison rate 2.63%) with Easy Street.

Less than 60% LVR

The below rates apply to owner-occupiers paying principal and interest:

• Average: 3.38%
• Athena: 2.39% Celebrate loan (comparison rate 2.39%)
• Lowest: 2.17% Freedom Lend’s Freedom Variable P&I 70% loan (comparison rate 2.17%)

Investors with principal and interest repayments pay an average of 3.79% compared to Athena’s 2.79% (comparison rate 2.79%), and a minimum of 2.59% (comparison rate 2.63%) with Easy Street.