Paul Clitheroe - cut the cost of the home loan
12 Dec 2011
ipac Paul Clitheroe
my weekly view
The Reserve Bank’s December rate cut was initially greeted with enthusiasm by home owners. However relief quickly turned to disbelief when the big banks proved reluctant to pass on the rate cut. This chain dragging may reflect difficult conditions in global financial markets but it also reinforces the need for borrowers to do some rate cutting of their own.
The banks’ hesitation to reduce mortgage interest rates is a direct result of the debt crisis being played out in Europe. The cash squeeze is affecting the availability – and cost, of funds that banks use to supply home loans here in Australia.
When the ANZ Bank announced it was lowering its standard variable rate in response to the Reserve’s rate cut, it cautioned, “The significance of the crisis in Europe has real consequences for the global economic outlook, for the Australian economy and for bank funding costs”.
The ANZ also added, somewhat chillingly, that “bank funding costs are now largely unrelated to movements in the Reserve Bank’s official cash rate.”
That may be the case but while our biggest banks – the Commonwealth Bank, National Australia Bank, Westpac and the ANZ Bank, dominate the mortgage market, many smaller lenders still offer very compelling deals on home loans.
A quick look at comparison site RateCity shows non-bank lender loans.com.au charges a variable rate of 6.38%; UBank (the online arm of National Australia Bank) offers a rate of 6.39% for refinancing customers, and State Custodians has an offset home loan with a standard variable rate of 6.47%. By comparison, the average standard variable rate, at time of writing, across the four major banks is 7.3%.
With a broad selection of low rate loans to choose from, many home owners could secure a rate cut of their own simply by casting their net wide across smaller lenders.
There are other ways to secure a lower rate. For example, ME Bank, which was one of the first lenders to pass on the Reserve’s latest rate cut, offers an ongoing rate discount of 0.45% to home loan customers who are members of a trade union or industry super fund.
Shifting your home loan from one lender to another does involve a certain amount of hassle. It’s also vital to weigh up the costs of refinancing against the gains of a lower rate.
Even if you stick with your current lender, it’s possible to trim the overall cost of your mortgage by keeping your repayments at the pre-rate cut level.
On a $300,000 loan the latest 0.25% rate cut should trim around $48 from your monthly repayments. Using this money to make extra payments can mean saving up to $22,000 in overall interest charges (over a 25-year term) and becoming mortgage free around 15 months ahead of schedule.
Check out financial comparison websites like InfoChoice, RateCity or Mozo to see how your current loan compares. Bear in mind some of the cheapest loans are not available through mortgage brokers.