Lending and property update: October

Interest rates have sat still for yet another month as the incoming RBA treasurer made little change from the previous modus operandi. This stagnation is welcome news for mortgage holders and renters alike, and competition amongst lenders on the pricing front is heating up as they vie for attention from borrowers without the sugar-hit allure of cash-back promotions to bring customers in the door.

Years ago, lenders jostled with their Standard Variable Rate, or Headline Interest Rate, and many media outlets used to publish these rates in their finance editorials as a quick comparison particularly between the major banks. Lenders have now evolved to provide instant changes to their interest rate, that do not raise the attention of the general public, by offering a multitude of different discounts off this Standard Variable Rate based on their own objectives of the day/week/month. The discount has to be requested on an individual client basis and is often based on volume of lending or LVR, but can extend to other indicators such as postcode, property type and even employment type. The result is that many borrowers have a different discount off the headline rate. As the Standard Variable Rate might move around, the discount remains fixed in the loan contract.

In order to attract more clients, banks and lenders are offering more and more attractive interest rates to drag clients in the door. Via these interest rate discounts, more desirable low-risk clients are taken off the market with discounts that could end up locking the client in for life.  These discounts are now in the range of 2.5% to 3.5% and as the competition heats up, so does the disparity between lenders with many clients observing at least a half of a percentage point difference between lenders. On Australia’s average home loan balance of around $590,000, that can mean savings of more than $2,500 per year in interest alone.