How the equity in your home can give you a cheaper interest rate
Equity has become a key battle ground for lenders looking for the "ideal borrower" to help shore up their loan books, following a busy year from the banking regulator APRA.
New research from RateCity.com.au shows that some of the lowest rates on the market are being reserved for mortgage holders who already have sizeable amounts of equity in their property.
Lender Mortgage House is currently offering a rock-bottom rate of 3.49% with one catch - you need to already own at least 70% of your property.
RateCity data shows that the average interest rate for a borrower who owns 30% of the property is 72 basis points less than a buyer who has just a 5% deposit.
On an Australian average mortgage of $350,000, securing the cheaper rate will save $150 per month or $53,899 over the life of a 30-year loan paying principal and interest.
RateCity money editor, Sally Tindall, says APRA's responsible lending mandate was causing lenders to actively seek out and pay a premium for the "ideal borrower".
"Borrowers who have benefited from the property boom are in the drivers' seat when it comes to rates," she says.
"The banks want you to have some skin in the game. Don't assume they offer the same rate to everyone. Those with more equity are being given the best deals.
"If you own more than 20% of your property, now is the time to ask for a discount on your interest rate or start shopping around for a new loan."
Principal & interest versus interest-only loans
RateCity.com.au research also confirms lenders are putting the best rates forward for borrowers willing to pay down their debt, following APRA's March edict to put the brakes on interest-only lending.
The site's data shows that the gap between principal and interest and interest-only loans is now on average 58 basis points.
"This year we've seen a huge amount of push back from the banks when it comes to new interest-only lending," says Tindall.
"While some lenders have stopped offering interest-only loans outright, almost all other lenders will make you pay a premium for the privilege of maintaining your existing level of principal owing."
The cheapest loans favour owner-occupiers paying down their debt. Reduce Home loans continues to be the market leader with an unmatched rate of 3.39% for those with a 20% deposit.
For investors hanging on to their interest-only loans for tax reasons there are still two lenders who offer rates below 4%, although they are a dying breed.
The cheapest interest-only loan currently belongs to Homestar Finance at 3.89%, but you must have a 30% deposit to qualify.
"While the cash rate remains at historic lows, with no sign of a hike in the immediate future, now is the perfect time to assess your mortgage and make the most of the equity you have in your home," says Tindall.