The central bank has urged borrowers should be “shopping around” for a lower rate after data sheds light on the interest rate gap between new and existing customers.
According to the latest monetary policy statement by the Reserve Bank of Australia (RBA), which contains an analysis of collected new mortgage rate data, the price differential between new and outstanding variable rate home loans grows with the loan’s age. Specifically, the RBA found that borrowers with variable-rate mortgages that originated four or more years ago are charged an interest rate roughly 40 bps more than borrowers who had just taken a new loan.
For example, a $250,000 loan balance implies an extra interest payment of $1000 per year, the bank observed.
The pricing gap reflects changes in lenders’ discounting behaviour, explained RBA governor Philip Lowe in his opening address to the House of Representative last Friday. “This reflects the fact that the discounts offered to lenders’ standard variable rates have risen over recent years, and these discounts tend to be fixed for the life of the loan – what might have once seemed a big discount might not be so big now,” Lowe said.
The RBA data shows that the average discounts major banks offer on standard variable rates went from roughly 100 bps in 2015 to an average of roughly 175 bps in 2019. This discounting disparity, the RBA said, allows lenders to remain competitive in the marketplace without the need to adjust pricing for existing customers.
However, the bank also noted interest rates charged on outstanding variable rate loans dipped by more than standard variable rates in recent years, and this can be attributed to the readiness of “well-informed borrowers” to negotiate larger discounts.
The aggressive pricing behaviour of borrowers to attract new borrowers reflects a highly competitive mortgage market, the RBA acknowledged.
“In part, the variation in interest rates paid by different borrowers reflects their creditworthiness or the riskiness and features of loans. In addition, it reflects the different interest rates offered by different lenders,” said Lowe.
“However, the time at which the mortgage was taken out also has an important influence on the interest rate paid. This reflects the tendency for competitive pressures to be strongest for new and other borrowers who are in the process of shopping around for a loan.”
Speaking to the standing committee on economics, Lowe encouraged mortgage holders to capitalise on the market’s competitive dynamic by reviewing their interest rate and refinancing to a better deal.
“If you took your loan out a while ago, it is worth shopping around and checking in with your lender to see if it can now give you a bigger discount,” added Lowe.