Last week, the European Central Bank (ECB) moved to a negative interest rate. I never thought I would see that happen in my lifetime and if I did, I thought it would be in Japan, not Europe.
Effectively, European banks are now paying the central bank for the privilege of having cash reserves. The whole idea is to push the banks to lend more money and to stimulate the economy.
Did you know our lenders borrow in Europe?
Australian lenders, in particular our non-banks, have been borrowing in Europe using a process known as securitisation. Prior to the global financial crisis (GFC), this gave them access to cheap money which in turn meant cheaper home loans for all of us.
During the GFC, the securitisation market all but dried up leaving many lenders unable to approve new home loans and many Australian borrowers stuck in high interest rate home loans.
Now the market has done a backflip!
The ECB and Bank of England have been making comments in support of securitisation. This has combined with negative interest rates to give the European banks with large cash reserves a big incentive to lend overseas.
Australia is seen as a safe economy with relatively high interest rates when compared to the rest of the developed world.
It’s because of this that European banks are now eager to fund our home loans!
How does this affect our lenders?
This doesn’t change the Reserve Bank of Australia’s (RBA) cash rate but it does affect the cost of funds to our banks.
Many of our banks are funded using a mix of sources such as deposits, equity and offshore loans. So this will only affect part of the cost of funds for our banks. Nonetheless, it will have a big effect on our non-bank lenders, potentially making them much more competitive.
So what is happening to your interest rate?
We’re seeing bigger and bigger ‘under the table’ discounts being offered by our panel of lenders. What that means is that the bank standard variable rates and the discounts the banks advertise are staying put. That’s great but if you know what you’re doing, you can do much better than that!
While most banks are advertising interest rates with a 0.7% to 1.0% discount, we’ve been able to get customers as much as 1.30% off!
For example, if you have a $1,000,000 home loan with an interest rate of 5.00% and we can get you an additional 0.30% off and you continue to make your old repayments, you’ll pay your home loan off 2.1 years earlier and save a whopping $136,480 in interest!
Why didn’t my home loan rate change?
You didn’t expect the banks to just give you a discount did you?
If the banks cost of funds goes down and they keep everyone on the old interest rates then they make a killing. There will be a few stories in the paper saying that the banks’ net interest margin has increased. Nobody will understand what it means and the banks will post some very healthy profits next year.
Unless, of course, you do something about it.
Now is the perfect time to check your interest rate to see if it is competitive. Log in to internet banking account and compare your rate to those on our interest rate specials page.
Who benefits the most from refinancing?
Refinancing isn’t for everybody. We find that the people who benefit the most are:
- Those who owe less than 80% of the value of their property.
- Those who have had their home loan for more than 2 years.
- Those who have a variable rate.
- Those with big mortgage. Bigger home loans means bigger discounts!
How do you find a better interest rate?
We’ve been watching special interest rate discounts get bigger and bigger since the beginning of this year and we know which banks are offering insane discounts under their professional packages.
Give us a call on 1300 889 743 or fill in our free assessment form and we’ll let you know what interest rates you may qualify for. You’ll be surprised!