Nick Bruining: Housing market downturn could mean sizeable savings for existing borrowers

The sudden decline in residential property sales across Australia means that lenders are scrambling to generate new mortgage business.

That could mean sizeable savings for existing borrowers, thanks to the intense competition. But where and when you bought your property could determine your ability to access the lower rates.

According to Canstar, owner occupiers can now access loans as low as 5.69 per cent per annum, which is significantly less than the average standard variable rate of 6.88 per cent.

Canstar data insights director Sally Tindall said the number of lenders lowering rates had been increasing.

“Competition among lenders continues to create opportunities for some households to cut their borrowing costs. The total number of lenders to have lowered new customer variable rates now stands at 18,” she said.

Veteran mortgage broker Gill McLean said borrowers with loans above $1 million were getting the best deals.

“The banks are competing strongly for this business. Even with a one-off fixed-fee payable, the interest savings more than justify a change,” she said.

While in the past, most experts have suggested talking to your existing lender first, that might now be just a starting point.

“Negotiating with your lender can get you on your way, but the bigger gains still typically come from refinancing,” Ms Tindall said, a position endorsed by Ms McLean.

“To get the best deal, you need to have at least 20 per cent equity in the property and it will generally be the mortgage brokers that have a handle on all the best deals on offer,” Ms McLean said.

Equity is typically measured by the loan to valuation ratio.

A property valued at $1.2m with a loan of $900,000 has a loan to valuation ratio of 900/1200000 or 75 per cent. That means the owner’s equity in the property is 25 per cent which is above the magic 20 per cent figure.

The same property with a loan of $1.1m has an LVR of 91.7 per cent, or equity of 8.3 per cent. In this case, the lender is likely to require the borrower to pay the premium for lenders mortgage insurance.

The cost of the premium for this insurance is likely to wipe out any interest rate savings by changing to a new loan with a lower rate.

While many existing borrowers who have been in place for years will easily meet the 20 per cent equity test, those who purchased in the past year or so will need to do their sums first.

Property expert Gavin Hegney said having 20 per cent equity wasn’t guaranteed. The recent decline in house prices may be a factor.

“There is some settling in prices around different areas in Perth at the moment which includes falls of up to 10 per cent in some areas,” he said.

“That particularly applies to those areas showing high growth during the boom.”

Mr Hegney added that the declines have not stopped yet.

“It would be a mistake to make decisions based on statistics showing that the Perth market is still robust and strong, given what’s happening in the home opens today and the price being negotiated by today’s buyers,” he said.

Properties listed for sale in Perth three weeks before the Federal Budget was handed down in May totalled 3669, with an average “number of days to sell” sitting at just nine days. Last week, total listings sat at 6114, with selling days up to 12.

Nick Bruining is an independent financial adviser and a member of the Certified Independent Financial Advisers Association