John Kypreos - Head of Residential Lending

The Australian property market is always a popular conversation. And why not? Throughout the past two decades, and through a global financial crisis, Australian property values have remained solid.

Despite this we head into 2012 with more global financial uncertainty, and important changes to the legislative environment that governs borrowings, leading to  a surprising shift in lending practices rarely seen in Australia.

Changes to lending practices

From July 1 this year lenders were banned from charging exit fees on home loans. This was a landmark ruling for Australia, opening up the opportunity for thousands of Australians to ‘shop' around their loan to find a better deal.

This is clearly a boon to competition in the lending market, where previously taking out a loan meant borrowers were wedded to their bank for many years, lest they incur the exit fee wrath. The strategy behind this practice was not just to lock in short term business, but that over time many customers may become content and be less likely to shop around after the exit period expired.

This is no longer the case, providing savvy borrowers the chance to find a better deal at any time - and often force their lender to match it or lose their business.

Fixed rate loans

The latest statistics from the AFG Mortgage Index reveal that one in five Australian's taking out a home loan are now choosing to fix their home loan rate.

And the banks and other lenders have joined the action. Increasing competition for this growing market, and leading to discounted interest rates (up to 0.8% below variable rates) not seen for some time. Traditionally our financial institutions have set their fixed rates just above variable rates, with the current discounts showing a clear reversal in this trend.

Many will consider a fixed rate loan for the major befit of the security of knowing what their repayments will be for the duration of the fixed rate period. The flip side to this benefit is that fixed rate loans can be more

restrictive than variable, and the borrower is taking the risk that interest rates won't continue to fall, leaving them paying a higher rate than variable.

What could a reduction in interest rate mean?

It seems fairly obvious - you don't need to repay as much. However a reduction in your interest rate can mean more than that, especially over time, and many are surprised at just how much of a difference can be made with a seemingly small decrease to the rate.

As our figure shows, for an average loan of $400,000 paying an interest rate of 6.81% pa - a saving of just 0.40% pa in interest over 25 years could save the borrower:

• $100 in repayments per month
• or $1200 in repayments annually
• or, most importantly: $35,000 in interest over 25 years

There is also a second option to consider. Should the borrower be able to afford continuing to make repayments at the same rate, thereby in effect putting that $100 back into paying off the loan, the end outcome will be a total saving over $60,000 further in interest!

Not only a huge saving, but the loan would be paid off more than 3 years earlier. These are significant savings that can help a homeowner or investor create room to absorb future interest rate rises, build equity faster, or to pay off their home loan sooner.