Key Points
- Many Australian home mortgage holders are paying a ‘commitment tax’.
- But shopping around can lead to huge cost savings.
- Here’s what you require to understand about refinancing and renegotiating.
When it concerns home loans, commitment merely doesn’t pay.
That’s the message home mortgage professionals have for owner-occupiers in Australia who are dealing with the possibility of additional rate of interest walkings in 2023.
The good news is that looking around for a much better offer might save the typical home mortgage holder more than $2,000 a year, or more than $100,000 over the life of the loan.
Whether it’s re-financing or renegotiating, here’s how to secure the very best offer and prevent over-paying on your home mortgage.
Are you paying a ‘loyalty tax’?
Data reveals that brand-new debtors regularly gain from lower rates than existing home loan consumers.
Higher rates paid by existing consumers has actually been called a “loyalty tax”.
“We know that lenders really do rely on customers not not being aware of the savings they could get, and just continuing on paying their mortgage off at the rate they got when they took out the home loan,” said Angus Gilfillan, CEO of digital home mortgage broker Finspo.
“But we know that the savings available, if you were to move on to the rate new customers get, is around 0.5 per cent. Which if you put out over [an average] 30 year home loan is $110,000. There’s not many things you can do in this day and age to save $110,000. And I’d say either negotiating or refinancing your mortgage is certainly something you should look at, particularly if you haven’t done that for a year or so.”
The from the Reserve Bank of Australia (RBA) reveals that in November the typical variable home loan rate for owner-occupiers with existing loans was 5.29 percent compared to 4.79 percent for brand-new loans.
Data reveals that owner-occupiers with existing loans are frequently paying considerably more than brand-new consumers. Credit: RBA
“It may sound like a small amount but when you consider that the average Australian mortgage currently stands at $574,000, that equates to a difference of $2,238 per annum that existing homeowners are leaving on the table,” Mr Gilfillan said.
Richard Whitten, the money editor at monetary contrast Finder, concurred that commitment is “really not rewarded by lenders in Australia”.
“You often find that lenders will offer slightly lower and more enticing rates to get in new customers, but they’ll keep their existing customers on an identical loan on a slightly higher rate,” he said.
“Loyalty doesn’t pay. You either have to shop around and look for a better deal elsewhere or you have to contact your lender directly, and say, ‘Hey, I’ve seen better deals on your own website for the same type of loan, can I get that same rate?’ They really do often make you do the work yourself to get a better deal.”
Refinancing
Shopping around for a much better offer on your home loan and changing to a lending institution that uses a lower rate might be a little bit of an inconvenience, however it can settle in a huge method.
“We’re seeing more Australians refinancing than we ever have before,” Mr Gilfillan said.
“If you take a look at the November statistics, it’s almost $20 billion of home loans re-financed in the month of November ‘22 versus about $10 billion November 2020. It’s almost doubled in two years.”
As many as 77 per cent of mortgage holders may be overpaying by not shopping around, according to financial comparison site Canstar’s December Consumer Pulse Report.
Over the previous year, 15 percent of home mortgage holders changed loan providers and protected a lower rate, Canstar discovered, while simply 8 percent of home mortgage holders who attempted to re-finance were not able to discover a much better offer.
“Most borrowers are paying interest rates well above the relatively low rates being offered to new customers, and the monthly savings are too big to ignore,” Canstar’s Steve Mickenbecker said.
“Borrowers can’t wait until they are unable to pay the bills to refinance into a lower rate loan. By then their desperation will be matched by lender aversion and they may find themselves out of luck with new lenders.”
While refinancing takes a couple of hours of work, it’s “absolutely worth it because the savings can be so big”, Mr Whitten said.
“It comes down to doing the research and looking at the loans, different lenders, looking at the interest rate, making sure it’s low. The other thing is factoring in fees. Some lenders charge a lot of fees, some charge almost none. And that can make a bit of a difference,” he said.
Comparing the functions provided by various home loans is likewise crucial.
“The offset account is usually the best feature on a home loan, it’s a savings account that’s attached to your mortgage, and every dollar you save in the offset account, while it’s there, temporarily offsets your loan,” Mr Whitten said.
“So if you’re looking at two loans that have really similar rates, but one has an offset account and one doesn’t, you might think ‘I want that offset account, that’s valuable to me as a flexible bank account attached to my home loan that lowers my interest charges over time’.”
Renegotiating your mortgate
The advantage of renegotiating with an existing lending institution is that it’s quicker and simpler than refinancing as it prevents the procedure of looking for a brand-new loan through a various lending institution.
Borrowers can either renegotiate themselves or utilize a home mortgage broker service to manage the settlement on their behalf.
“My advice would be to make sure you know your current loan details and your current rate. Be informed around what’s happening in the market, so have a couple of competitor rates and quotes that you can then put to the lender so they know that you are informed and market,” Mr Gilfillan said.
“But the most important thing is to make the call.”
Mortgage holders ought to examine their home loan rate a minimum of when a year, Mr Whitten said.
“Check your rate, check your statement. Then look at the lenders’ website – has your rate gone up versus their best offer, are there better rates elsewhere?” he said
“You’d be surprised how often people who’ve had a home loan for a few years might be on a much higher rate than they could get even with the same lender,” he said.”
Will rate of interest increase even more in 2023?
The RBA sets the country’s main over night money rate, a criteria that has a significant influence on home mortgage rates provided by loan providers.
The main money rate presently stands at 3.10 percent, after the RBA raised the rate for the 8th time in as lots of months at its last conference of 2022 on 6 December.
The RBA has actually cautioned of additional rate of interest walkings in 2023 if inflation continues to increase.
The reserve bank “expects to increase interest rates further over the period ahead, but it is not on a pre-set path”, the RBA’s from 6 December exposed.
“Members noted that the size and timing of future interest rate increases would continue to be determined by the incoming data and the Board’s assessment of the outlook for inflation and the labour market.”
The RBA board will reunite on 7 February to provide its decision on whether it will hold, cut, or raise the money rate.
