Joyce Moullakis| The Australian| 2 August 2022
A greater number of lenders are wooing home loan borrowers who have bigger deposits with markedly cheaper rates – as mortgage customers brace for a fourth 2022 rate rise this month.
The Reserve Bank has applied three rapid-fire rate increases since early May totalling 1.25 per cent and taking the cash rate to 1.35 per cent, as part of its efforts to cool rampant inflation.
Economists are tipping a further 50-basis-point move on Tuesday, which would trigger another round of sharp increases in variable home loan rates.
As rates have risen from historic lows, banks and other lenders are increasingly using risk-based pricing to reward those with larger deposits or equity in their home with lower rates.
Canstar analysis shows about half the 95 lenders they track price loans with a 40 per cent deposit at a lower interest rate, compared to those where borrowers have a 20 per cent deposit. Borrowers with larger deposits are deemed less risky by banks and other lenders, particularly against the backdrop of falling property prices.
In February last year, about 34 per cent of 91 lenders had differential pricing based on deposit.
According to Canstar, the lender with the biggest gap in pricing given the deposit or equity being tipped in comes from Arab Bank Australia, where there is a startling 2.69 per cent differential in the rate, depending on whether the borrower has a 40 per cent or 20 per cent deposit.
National Australia Bank is the latest to introduce more deposit and equity tiers and discounts for borrowers deemed less risky.
The four new tiers – on specific fixed and variable loan products – have come into effect for mortgages coming through brokers and will be rolled out broadly to branches and other channels within the coming month.
“The new … product gives customers certainty around the impact of having a larger deposit or more equity in their property on rates and fees,” said Andy Kerr, NAB’s executive for home ownership. “In a rising rate environment, it’s important customers have certainty in pricing.”
The first tier offers the cheapest pricing to home loans with a deposit or equity of 40 per cent or more, while at the other end of the spectrum those with a deposit or equity of less than 20 per cent fall into tier four.
While banks have always generally taken into account the size of a borrower’s deposit, the more granular pricing around deposit size seems to be taking off. NAB is yet to disclose the exact discounts the new deposit and equity tiers deliver on rates.
ANZ has released new rates, effective this week, for its basic home loans that boost the discount for borrowers with chunky deposits. For those who have a deposit of at least 30 per cent of the property price, the mortgage rate falls by 10 basis points to 3.19 per cent. For borrowers with a deposit of at least 20 per cent the rate drops by a further 25 basis points to 3.29 per cent.
The changes come as equities analysts at Jarden expect fiercer competition in the mortgage market between banks and other lenders as $500bn worth of fixed-rate loans near expiry.
Canstar’s financial services group executive, Steve Mickenbecker, said lenders were “competing harder” for lower-risk borrowers in a more uncertain economic climate in which rates were also rising.
“Property prices are widely expected to fall by 10 per cent to 20 per cent, which would see 80 per cent loan-to-value ratio loans too close for comfort to zero equity,” he said.
“Lenders are looking for loans where there is a greater buffer for falls in property prices and almost half of them are rewarding these borrowers with lower interest rate offers.
“Having enjoyed strong house price increases over the last couple of years, borrowers who have been in their houses for several years now own a healthy share. There may be a strong case for borrowers in this position to open up a negotiation with their lenders for a rate reduction.”
Mr Mickenbecker said the lowest rate available remained 0.69 per cent below the average for lenders that offer a discount for borrowers with 40 per cent deposit or equity, making it compelling to consider switching.
Credit Union SA’s chief member and experience officer, Karen Beard, said the lender had two tiers for its owner-occupied mortgage pricing.
For a deposit or equity of 20 per cent of more it charges 2.84 per cent, not including fees, while for those with smaller deposits such as first-home buyers the interest rate rises to 2.99 per cent. “We are still seeing quite a number of first-home buyers out in the market,” Ms Beard said, referring largely to the Adelaide market. She said Credit Union SA was not seeking further tiers for different rate pricing as it could also confuse potential borrowers. “When you add more tiers in, for example, it just gets that bit more complicated,” Ms Beard said.
She also said that, despite three rate rises so far this year, the lender was not seeing an increase in requests for hardship assistance.
A mortgage broker, who declined to be named, said Westpac typically was providing the biggest discretionary discounts for borrowers with large deposits or significant equity.