Home in on a lower loan rate
AT InvestSMART we encourage investors to embrace low-fee investment choices. But plenty of Australians could be paying more than necessary on their home loan at a time when interest rates are the lowest in 70 years.
The Reserve Bank’s October rate cut saw the official cash rate drop by 0.25 per cent to 0.75 per cent. It is the lowest rate since the 1950s. So it makes sense to be sure you are not paying more on your home loan than necessary.
The thing is, none of the big four banks — ANZ, Westpac, the Commonwealth or NAB — passed the full 0.25 per cent October rate saving on to their owneroccupied home loans.
Yet three out of four Australians have their mortgage with one of the big banks. It means a raft of people could be missing out on some of the lowest home loan rates in living memory.
Rates on fixed loans, in particular, have been tumbling. A total of 17 lenders cut their fixed rates in the week following the latest rate cut.
It is now possible to lock in a rate below 3 per cent. Greater Bank, for instance, has a one-year fixed rate of 2.79 per cent. Even the major banks are getting on board with two-year fixed rates below 3 per cent available from CommBank, NAB and ANZ.
I would not be locking into a fixed rate right now. As we head into a period of what could be sustained low rates, some pundits are tipping another cut to the cash rate on Melbourne Cup Day. It turns out that many homeowners feel the same way, with only one in 10 new loans involving a fixed rate, according to RateCity.
The main point is that there is a good choice of home loans with rates below 3 per cent. If you are paying more, chances are you are paying too much.
Yes, refinancing your mortgage can be a hassle. If that is holding you back from seeking a better deal, think about speaking with a mortgage broker, who can do the hard yards for you.
Switching can also involve costs including fees to set up the new loan and to discharge your old mortgage. But it could be worth your while.
Crunch the numbers, or have your broker or lender do the sums for you, to see if refinancing puts you ahead financially. The less time it takes to recoup the costs of refinancing, the better.
And in an environment of falling interest rates, it can be worth looking for a lender that is willing to share the bulk of Reserve Bank rate cuts with its home loan customers rather than holding something back. Paul Clitheroe is chairman of InvestSMART, chairman of the Australian Government Financial Literacy Board and chief commentator for Money Magazine.