Banks vs non-banks: What you need to know about home loan rates

Not all lenders treat cash rate rises the same way. Effie Zahos reveals the difference between banks and non-banks plus she shares her top tips for refinancing.

Homeowners have been slapped with a ninth consecutive rate hike. In total, the cash rate has moved from 0.10% in April 2022 to 3.35% in February 2023. And this is probably not the last rate hike we will see in 2023, with three of the four major banks predicting rates will continue to rise.

In addition to rising rates, mortgage holders are struggling with the cost of living as inflation has soared. Households have been forced to make serious cutbacks on everyday expenses – or even go without.

According to Canstar, the latest 0.25% rate rise means borrowers with a $500,000 mortgage over 30 years will be paying about $969 more per month on their repayments than they were in April. That adds up to a whopping $11,628 per year.

The annual increase in home loan repayments is equivalent to the annual average costs for home and contents insurance, comprehensive car insurance, health insurance, electricity and gas, home internet and mobile phone plan.

The good news is that even though the cash rate has been increasing steadily, not all lenders have passed on the rate hikes in full on all their products. Prior to the February cash rate decision, 75% of lenders on Canstar’s database had not increased at least one variable rate for new customers by 3% since April. 

This doesn’t necessarily mean that these lenders are offering the cheapest rates on the market. What it does highlight, though, is that just because the Reserve Bank increases the cash rate, it doesn’t automatically mean borrowers will be stung by that same amount. Just how much rates rise and how fast they go up – or even down for that matter – varies from lender to lender. So, it really does pay to keep an eye on what your lender and other lenders are doing.

Banks vs non-banks

Typically, non-banks (those that don’t have a full banking license and can’t accept deposits from the public) tend to offer lower rates than banks. But as rates continue to rise, both here and overseas, the cost of funding for non-bank lenders will climb higher than it will for banks. One reason for this is that they just don’t have access to cheap deposits they can call on for funds, while banks that offer savings accounts do.

We’re already seeing the gap between banks (Authorised Deposit-taking Institutions ADIs) and non-banks (non-ADIs) closing. As you can see from the table below, the gap between the average variable rate of the banks compared to the non-bank lenders in May 2022 was 0.71 percentage points. Today, that gap has shrunk to 0.56 percentage points. 

Average variable rates

← Mobile/tablet users, scroll sideways to view full table →

Source: www.canstar.com.au – 7/02/2023. Based on owner occupier variable home loans on Canstar’s database, available for a loan amount of $500,000, 80% LVR and principal & interest repayments; excluding introductory, first home buyer only and green only loans.

The tip here is to keep an eye on your rate and how it compares to other rates on the market. Even if you have scored a rock-bottom rate, keep in mind that this may change so it can pay to be vigilant.

If you do notice that your rate is increasing faster or higher than that of other lenders then it may be worth looking into refinancing. Chances are you’ll be able to score a better deal. Reserve Bank data shows that there’s a 0.5% difference between the interest rate offered to new customers versus existing home loan customers. On a $500,000 loan over 30 years, that’s a saving of $153 a month on repayments.

Compare home loans

Tips for refinancing

If you are thinking about switching lenders to get a better deal here are my top tips.

Approach your existing lender first

Be sure to ask your lender if they can offer you a cheaper home loan alternative. Sticking with your existing lender can save you from having to fill in all the paperwork that comes with applying for a loan and you will also save on any fees associated with refinancing.

Know your equity

Consider how much equity you have in your home. The more equity you have the better the interest rate you could potentially get. Lenders often offer cheaper rates to borrowers with a lower loan to value ratio (LVR).

Also, keep in mind that if your equity is less than 20% it will mean you will need to pay for lenders mortgage insurance (LMI) – even if you already paid it when you originally got the loan. This may make you think twice about refinancing.

Add up the costs to move

Always do a break-even analysis before you switch. You need to add up all the costs of moving your loan to a new lender and divide it by your monthly saving. This will show you how long it will take to recoup the cost of refinancing. For example, if it would cost you $1,500 to refinance but you would save $150 a month in repayments, your break-even period would be 10 months.

Reduce your credit card limits

It’s a good idea to reduce the limits on your credit cards – even if you have no outstanding debt. For every $10,000 credit card limit you have, your borrowing power can potentially be reduced by around $50,000.

Don’t change the term of your loan

If you have 23 years still to go on your existing home loan, take out your new loan over 23 years as well rather than 25 or 30 years. By increasing the term of your loan, you end up increasing the overall cost of the loan which can defeat the purpose of refinancing. Of course, if you are experiencing mortgage stress, changing the term of your loan could be a good band-aid solution to get you through this difficult period as your repayments will fall. Just remember to increase them when things ease again.

Cover image source: reezuan/Shutterstock.com