Those with a variable-rate mortgage should not be too disappointed that the Reserve Bank left the cash rate unchanged last week because it’s more likely than not the bank will cut interest rates possibly as early as next month.

The resources sector has been holding up the Australian economy and, while the boom was in full swing, the bank kept rates relatively high to ward off inflation and overheating of the economy. But with the rapid fall in commodity prices and a cooling of the mining boom, the economy’s rate of expansion will slow.

With inflation benign, the Reserve can cut rates, though predicting rate movements is always hazardous.

But the fact is, even without a cut in mortgage rates, those with big mortgages and a good credit history are in the box seat to get a rate discount from their lender. It’s a tough market for lenders as cautious consumers have been careful with debt. The number of home loans financed continues to be at near record-low levels, and lenders are keen to sign up new borrowers as well as retain existing borrowers.

Anyone with a mortgage of more than $300,000, a good credit history and substantial equity in their home should be able to get the lender to discount its standard variable rate by at least 0.4 percentage points. Even those with at least 25 per cent equity in their house should be able to get a discount because they are a lower risk to the lender. But be careful of going for a fixed-rate mortgage. Even though fixed rates are generally lower than variable rates, with the Reserve Bank more likely than not to start cutting interest rates, there are likely to be lower fixed rates for those who wait. Cheaper interest rates are certainly worth pursuing.

Researcher RateCity says the average standard variable home-loan rate is 6.35 per cent. It says if someone with with a $300,000 mortgage with variable rate of 6.35 per cent was to receive a 0.4 percentage point discount, the savings would be $78 a month or almost $1000 a year. After 30 years, more than $28,000 would be saved. RateCity has variable-rate mortgages on its database, starting from as low as 5.62 per cent, with 57 variable home loans that are less than 6 per cent.

So if your lender doesn’t want to retain your business, there are plenty of competitive options out there. Be warned, though, those considering changing lender need to take account of any exit fees they may have to pay.

From July 1 last year, the government banned exit fees on new mortgages. Early exit fees are usually deferred establishment fees. They are charged to borrowers who end their mortgage usually within the first three to five years of the loan. The majority of mortgages had early exits fees

Posted by John Collett – The Age on 12th September, 2012