With lending rates at record lows, it's important to ensure you're getting the best deal – but is refinancing to a ‘cheaper’ home loan all it's cracked up to be?
Blogger: Marie Mortimer, managing director, loans.com.au
A low home loan interest rate seems to be the holy grail of sound financial management. At the very least, it gives the borrower who’s bagged one that satisfied feeling of being good with their money. But what does it do for you, really? And is it worth all the research, paper shuffling and late-night decision-making?
Does it matter if your home loan interest rate is a couple of basis points – or even quite a few – higher than the market’s most competitive? What if it came with a tasty sweetener at the beginning, like a honeymoon rate or a holiday, or a gift card?
Ultimately, the home loan you choose is a matter for you. You know what loan features you are looking for, what interest rate you are happy to settle for and how much priority you might place on any promotional incentives that could be on offer from particular lenders. But the long and the short of it is, low interest rates do matter. A lot.
Research from comparison site finder.com.au shows the average mortgage is eight times bigger than it was for Australian households 30 years ago. The current average mortgage is $334,000 on an average annual income of $79,000.
In 1984, the average mortgage size was $37,542 on an average annual salary of about $19,000. The proportion of repayments to income was 23 per cent, and now it’s 29 per cent.
With ever-greater numbers of Australians managing their money carefully with a view to getting into the property market, and willing to allocate a bigger slice of their household income to achieving their goal, every basis point counts when it comes to your home loan interest rate.
Every 0.25 percent is worth about $50 a month in higher repayments on a home loan of $300,000. That means, for every 0.25 higher your interest rate, it will cost about an extra $600 each year and potentially more than $18,000 over the life of the loan.
This is real money, not just numbers on a page. This is extra cash you will have to find every month. Or not. Low home loan interest rates are very important.
It is a good rule of thumb to investigate a loan product’s interest rate using the comparison rate, which will factor in any fees associated with the loan to give you the true cost, as well as the loan’s flexibility and features. Don’t be tempted to compromise on a low interest rate for a promotion or gift. This is just a marketing tactic and the cost of the campaign will have been engineered into the value of your loan.
If you fancy a holiday down the track, perhaps you could use some of the $18,000 or so you will have saved on every 0.25 percent off your interest rate.