Home Loan Interest Rate Rises


home loan interest rate rises November 2010When the Reserve Bank of Australia increased cash rates by 0.25% on Melbourne Cup Day 2 November the Commonwealth Bank immediately responded by increasing its standard loan rates by 0.45% to the fury of Australians everywhere. ING Direct also responded by offering $1,000 to anyone who refinanced their mortgage through them before 30 June 2011 if you registerd by 30 November 2010. The remaining banks waited for the furore to die down before announcing that they too were increasing rates by greater than the RBA 0.25%. Here are the rate increases by the Big Four Banks and ING Direct.

Latest Big Four Bank Mortgage Rate Increases

Bank Interest Rate Rise
Reserve Bank of Australia 0.25%
ANZ 0.39%
Commonwealth Bank 0.45%
NAB 0.43%
Westpac 0.35%


These rate increases have now been passed on by all the big four banks to their products as shown below:

Home Loan Product Interest Rate Comparison Rate
ANZ Simplicity Plus (Basic) 7.10% 7.15%
ANZ Variable Rate (Standard) 7.80% 7.90%
CBA Economiser Base Variable Rate 7.30% 7.43%
Commonwealth Bank Standard Variable Rate 7.81% 7.94%
NAB Base Variable Rate Home Loan 7.17% 7.21%
NAB Tailored Home Loan 7.67% 7.80%
Westpac Flexi First Option Home Loan 7.16% 7.21%
Westapc Rocket Repay Home Loan 7.86% 7.99%
ING Direct Orange Advantage (< $300k) 7.34% 7.51%
ING Direct Orange Advantage (> $300k) 7.09% 7.26%
ING Direct Mortgage Simplifier 7.12% 7.12%



Exit Fees in the Spotlight

ANZ whilst increasing its rates by 0.39% also indicated that it would be abolishing the Deferred Establishment Fee (an exit fee) for mortgages and providing the following incentives for new and existing customers:

Waiving the loan approval fee of $600 and a subsidy of up to $1,000 to offset exit fees from other lenders for those switching. BUT ONLY IF YOU SWITCH TO A 3 YEAR FIXED RATE HOME LOAN.

ASIC in a media release on 10 November signalled their intention to prevent banks charging unreasonable exit fees.

“Mr D’Aloisio said that ASIC’s initial focus will be on the highest fees in the market as they create the biggest barriers to switching. ‘We will challenge lenders who charge high fees to justify how their fee reflects actual losses caused by early termination. Where an exit fee cannot be justified by the lender, ASIC will take compliance or enforcement action.’”

Home Loan Switching Tips

Switch to a basic home loan product. Every major bank has two types of variable home loans, a basic product and a “standard” product. There is typically very little real difference in features between these products but the interest rate difference across the Big Four Banks ranges from 0.50% to 0.70% pa. On a $300,000 loan this works out to be $136.33 pm or 1,636 pa. If this was applied to your loan it would result in paying off your loan up to 4 years and 7 months earlier.

Hang on – What are the Exit Fees and Application Fees

Before you rush off to switch, ask your current loan provider what the exit cost are. Make sure any recent interest rate increases are accounted for in the calculations. If the costs are significant it may pay to wait 12 or more months as exit fees are typically much higher in the first 5 years. Each product is different and you need to find out these details from your bank.

You also need to take into account all costs associated with the new loan. If your loan to equity ratio is high there may be more costs involved.

The easiest way to switch home loans is to consult a professional mortgage broker. They are required by law to take into account your situation before making a recommendation. A good mortgage broker will also be familiar with most products on the market and be able to answer any questions.

Warning: Home loans have exit fees. Please consult your current lender to find out what they are before considering switching to another product. It’s strongly recommended that you consult a reputable licensed lending adviser before taking any action as large financial losses may result from imprudent decisions.

ASIC Exit Fee Summary

ASIC have compiled a summary table of exit fees to help the public understand what you might face when you switch home loans.

Summary



Key issue


Summary of ASIC guidance


What is an early exit fee?


Any fee payable on early termination of a residential loan, generally including deferred establishment fees.


Types of costs and losses which may be able to be included in an exit fee

  • break fees when a fixed rate loan is terminated
  • administrative costs (e.g for processing the early termination and calculating the payout figure)
  • third party costs that arise because of the early termination
  • costs that have not been recovered because a loan with a honeymoon or introductory interest rate is terminated early
  • unrecovered establishment costs arising from a lender’s inability to recover establishment costs during the shortened period the loan was on foot.


Types of costs and losses which may not be included in an exit fee

  • loss of profits that would have been received if the loan proceeded to the expected term or if the loan had lasted beyond the time at which the customer terminated the loan
  • marketing costs and other costs associated with obtaining new customers
  • costs associated with developing new products.


The limited circumstances in which a lender may vary an exit fees


  • Lenders will generally not be allowed to increase early exit fees on variable rate loans after the loan has commenced, particularly if the early exit fee comprises unrecovered establishment costs.



How lenders can explain their early exit fees transparently

  • explaining in a meaningful and clear way when the fee will be charged
  • clearly stating the amount in dollars of the fee or, if that is not possible, the method of calculation
  • using prominent warnings to explain risks associated with early termination fees, particularly break fees
  • using meaningful worked examples of break fees, as long as they can be provided in a way that is not misleading.


Break fees on fixed rate mortgages


The break fee must reflect the cost incurred by the lender because the loan was terminated early.



Note: the following table is reproduced from the ASIC website for your benefit in accordance with ASIC’s linking policy. Please note this site is not affiliated in any way with ASIC and the reproduction of ASIC material should in no way infer that this site is endorsed by ASIC.

Leave a Reply

Your email address will not be published. Required fields are marked *